How to Measure Business Risk

With every business there is some degree of risk. Even the most thorough business plan can't eliminate business risk. However, by employing risk management now you can mitigate the damage later. How you measure risk and implement tools to minimize it will determine whether or not your business will be a success. Keep in mind that risk management is a continual process.

Things You'll Need

• Cash flow statements

Instructions

1. Meet with stakeholders and key employees to identify potential risks, such as project delays, disasters and market fluctuations. Determine the extent to which seasonal issues will affect your business (by reviewing past performance or market trends). Determine how you will prevent information technology (IT)-related risks such as computer failure and loss of data. Determine how you will protect human resources information such as payroll and private data. Download the free Microsoft Security Assessment Tool (see Resources) to help you assess IT risks. Then establish contingency plans, such as IT security measures to address all parties' concerns.

2. Identify the macroeconomic variables such as inflation, unemployment and rising fuel costs that may affect your sales or production and distribution costs. Estimate how those variables will affect your profitability.

3. Identify other potential risks that might affect your production such as new government regulations on domestic and imported goods. Set up news feeds via Google.com.

4. Create a cash flow statement. This will help you recognize how much cash you have readily available and help you identify how prepared you would be to combat a risk. Keep enough liquid assets to fund your business for at least six months. Keep an eye on receivables. Understand that a customer owing you money isn't a guarantee that you will get it back.

5. Measure each risk by creating a formula based on the components involved, such as net income minus expenses, or the probability of an event or accident multiplied by the cost of the event. Use best estimates when predicting events for which you don't have previous data or experience. Delegate a percentage of importance for each potential risk based on priority levels.

Tips & Warnings

• Trust your instincts, but listen to people you trust. Hire managers who have the skills that you lack.

• Diversify your suppliers and customers. Don't be reliant on one or two suppliers. If a supplier goes bust or hikes up its prices, you won't be scrambling to find another.

References

• How to Identify and Measure Business Risk
• The Biggest Risks to Your Business
• An Entrepreneurs Most Important Asset

Resources

• Microsoft Security Assessment Tool