How can you identify risks for a business? Give examples to support your answer

 

Question:

How can you identify risks for a business? Give examples to support your answer

Note: Risk identification is the first and most important step in creating a risk management plan.

This answer details how business risks can be identified.

• Break down the bigger picture

When beginning the risk management process, identifying risks can be overwhelming. It is important to start with a high-level analysis by asking what things could obviously go wrong with the business. These can be based on your business strategy and daily activities.

Understand that risk is multi-faceted and has many categories in terms of; competitiveness, finance, safety, operations, technology, legality, reputation etc. Therefore, breakdown the business into these individual areas and consider weaknesses of each as risks.

To find these weaknesses, you may ask insightful questions such as; Are all employees well trained? Are all business processes safe? Is manufacturing of good standards? What would happen if you lost the biggest customer? A question that cannot be answered positively represents risks.

• Be pessimistic

This entails focusing on the negative.

Ask these questions, what is the worst thing that could happen to the business? If there is a day where everything went wrong, what would that sequence of events look like? While being overly pessimistic may not be the best way to run a business, its incredibly helpful when identifying risks.

It is critical to avoid overconfidence and thinking that something cannot/wouldn't happen. Challenge all your assumptions about any potential risks, and be prepared for any or all of them to occur.

• Consult an expert

Seek for help from experts who understand different sectors in which the business may be operating in. These may be; insurance brokers, accountants, or financial advisors.

In this case for instance, insurance brokers know the much needed history, which means they can provide insights on trends. If you experience the same types of losses multiple times, it suggests there is a risk that is improperly managed.

Brokers can also help assess business risks and recommend insurance coverage to help protect against risks.

Accountants and financial advisors will have insight on the types of payments you are repeatedly making. They can help identify financial risks throughout the business.

• Conduct internal research

If one manages his own profits/losses or has employees that work closely with them, he may perform internal research to identify risks across the business. Using simple observation, one may be able to recognize areas where things aren't being done correct. Very high costs in department may suggest unmitigated risk.

Using data and trend analysis, one can identify the causes of that.

Additionally, incidents and near misses are key indicators of problem areas that need to be addressed by the risk management team.

• Use models or software

There are many business and technological strategies that help identify and classify risks.

These are; simulations, scenario role-playing, SWOT analysis, flowcharts, and risk mapping among others.