Risks of all types can arise in any business activity: related to taxation, the market or the regional or worldwide macroeconomic situation, liquidity problems, unexpected incidents such as fires or floods, and the increasingly frequent cyberattacks by hackers.
Given that these potential risks can affect any organisation, what can really make the difference between success and failure in business is how one manages these dangers. It is not possible to avoid risks completely, but it is possible to put measures in place to reduce the likelihood of a potential danger becoming real and to minimise the consequences if the incident ultimately occurs. In today’s rapidly changing and highly competitive business and economic context, errors can prove very costly, so we must have cover for any adverse circumstances.
Risk assessment: a key stage in risk management
Risk management is a complete process that can be divided into 5 stages: risk identification, risk assessment, dealing with risks, communication and monitoring. This is a linear process that begins with a preliminary identification of the risks, continuing with an assessment and analysis of each of them, and proceeding to deal with them by implementing appropriate measures. The next stage involves effectively reporting the risks detected and the measures taken to control them. The process ends with regular systematic checks to confirm that the measures being taken are appropriate, which also includes regular reassessments to detect new hazards or uncertainties that may affect the company.
Below, we explain what risk assessment, the second stage of the management process, consists of and how it is carried out.
Purpose of risk assessment
Risk assessment is carried out once risks have been identified, in order to analyse each of them separately and to determine key factors in preventing and dealing with them.
Determine the likelihood of the event occurring.
Assess the impact each risk may have on the organisation: financial losses, impairment of the brand’s image, reduction in market share, etc.
How risk assessment is carried out in business management: its different stages
Assessment is one of the most complex and important stages in risk management for companies. It involves the design of a strategy in which internal protocols and procedures are established on how to act to prevent risks and resolve or reduce the effects of incidents if they should occur.
The complete risk assessment process comprises the following stages:
Classification and structured organisation of potential risks detected. There are many categories of risk and most of them can be divided into smaller subcategories. For example, we can distinguish between incidental risks, strategic risks, technological risks and financial risks, among other categories. Within financial risks, we would find subtypes such as: liquidity risk, market risk or operational risk.
When we have classified the risks, we need to analyse each of them. The aim is to determine the possible effects they may have on the organisation and to assess the best measures or responses by the company to prevent them from occurring, or to reduce their consequences.
The third stage consists of drawing up protocols and internal procedures and assigning responsibilities. The idea is to implement the risk control measures selected as well and as effectively as possible.
When establishing risk management strategies, it is important to understand that, to a certain extent, they are related to the company’s decisions, which may be organisational, operational, related to investment, etc. But there are also circumstances that are difficult to foresee, which may be connected with the business environment (market swings, political decisions, social changes, etc.) or even with natural disasters that are totally random, such as earthquakes.
However, even the most unpredictable circumstances can be controlled to a certain extent, for example, ensuring adequate compensation by taking out a good insurance policy.
Risk management is the key and the best mechanism available to companies to control, avoid or mitigate the impact of anything that can affect the productivity and profitability of the organisation.