Risk Analysis in a small business
Image/ Risky task

Starting a business is really a good idea when you are good at not only taking risks but also doing risk analysis in your small business startup. Some people are sharp and calculate and analyze things in a very short time. Such people are known as Entrepreneurs.

Risk assessment is very important factor in your business which decides about the future of your business. Now the question is how to take calculated risk or how to perform risk analysis by yourself? If you’re mentally preparing yourself to dive in the industry of businesses, that is really a great question to ask! Let’s consider it.

Learn Intelligent Risk taking

It’s about taking the right decision after certain calculation and researches. If you’re good at it, you’ve greater chances of getting started with your own business and making it big success. There are a few important things to look at and analyze the risk when you have finalized the idea. In intelligent risk assessment you must consider the following things.

1: Risk Analysis ( aka Reward Analysis)

When we start working on a business idea, we look at the following things.

  • Best Possible Outcomes
  • Worst Possible Outcomes

And, we most of the times think that we have already done this. But most of the people forget to do this case scenario analysis. In our daily life, we avoid taking small risks and we think we cannot handle these risks. This is not the reality. We can handle a lot of small risks and the worst possible outcome would be no gain or you can say that by the end of the day we shall be standing at place from where we started. Isn’t it so? We should start taking small risks which don’t have any real negative impact because they will teach us risk assessment.

Let’s take an example, Mr. Adnan is a worker and his salary is low. He wants to ask his boss for a raise. And he’s confused because he thinks he will feel bad if the boss says no. Yeah, it will feel bad but the boss will neither fire at Adnan nor demote him. So, he should ask his boss because there is no real risk but real benefit is there. This is how you simply make a risk analysis. It’s usually based on questions such as what’s the best possible result and what’s the worst case scenario? How much resources and time will it take?

2: Failure Mitigation Effect Analysis (FMEA)

FMEA is a great tool for risk analysis. This is freely available in excel format and you can Google it now! This is the place for listing all the possible risks which are directly or indirectly related to your issue or business. You can imagine anything, natural disasters affects to technology and cultural revolutions or even going to Mars as well! And then comes the risk analysis calculations.

Risk Analysis Formula:

For every single risk, calculate these 3 things! (Scale them with 1-10)

  • What’s the possibility of occurrence? Let’s say X1: 4
  • How hard will be the consequences? Let’s say X2: 6
  • Would you be able to solve the issue? Let’s say X3: 7

Now, you multiply these X1, X2 & X3 and you get the risk priority number which would be in a range from 1 to 1000. In our case, RPN is 168. The higher is the RPN, there is more risk and you should be more careful. You should think of alternative strategies if RPN is higher. Don’t worry, risk in business is business is always there but the severity matters! Risk management seems an art. Isn’t it? Some people are really good at it.

3: Executive Planning

I am sure you know about the famous quote about planning, if you fail to plan, you plan to fail! When you’re done with the above two steps it means you’re planning. Yes, you’re planning for your future business and risk management.

Asking for help from people who have been through high risks in a business which is related to your idea is a very good thing. Wisely choose to whom you should talk as everyone acts as consultant and that’s a high risk which you cannot afford. So, Plan like a boss and start working like a hardworking, smart, honest and consistent employee to get maximum results in a very short time!

4: Stop Loss Planning (aka Exit Strategy)

What if things don’t work for you and all your risk analysis is wrong? Don’t be panic, you’ve still got another plan to work on. And that’s the Stop Loss Plan or the exit strategy. Before starting any business, you need at least one stop loss plan. You can have more than one plans to work on if things go wrong. This is the point where Entrepreneur differentiates from other people who are in business. Diving your plan into Milestones and reaching the milestones in different strategies is the best way to reach your goal. If you want to reach point TOP, you must have paths like T-O, O-P, T-P getting my point? Yeah, it’s simple! If none of these paths work, how about selling the business at the bottom?

Intelligent risk assessment is just about learning these four steps i.e. understanding, planning, executing and knowing when to escape from the plan if it fails! Anything you plan with risk analysis, you’re planning for success!