How to Quantify Business Risk

One of the more important set of tasks that an organization carries out is clearly quantifying business risk. This helps drive key decision making throughout the company across key functional areas like finance, marketing, operational and others. Quantifying business risk allows management to implement proper risk management guidelines and to effectively prioritize and deploy their resources. A key element of the risk quantification process is risk assessment, which involves the determination of the risks surrounding a business.

Instructions

1. Determine the financial risk involved in your business. To quantify this risk you will need to lay out how much money is needed and what needs to be created in terms of cash flow to meet the company's financial obligations. Specific numbers need to be created. For instance, the XYZ Company will need to generate a $120,000 per month in order to satisfy all their financial obligations and to break even. Attaching figures clearly quantifies what has to happen financially or risk losing money or burdening shareholders with more financial risk by using debt in addition to equity financing. This shows management the risk that the company will have if they do not create adequate cash flow to meet its operating expenses.

2. Quantify the company's market risk. This is where you explicitly state the impact on the company's revenues and profits if they lost market share to their competitors. To thoroughly be able to quantify this particular business risk requires an extensive competitive analysis. In addition, quantify the risk if the overall demand in the company's market space declines due to economic reasons. Attach specific numbers to specific percentage declines to help management visualize this business risk.

3. Account for political and country risk exposure. To properly quantify this type of business risk, identify the variety of risks of doing business in a particular country. For instance, you must consider political risks, exchange rate risks, economic risks and sovereign risk, which is the business risk of capital being put in the deep freeze due to government action or the defaulting of loans by a country without having any recourse. Quantify this type of business risk by putting numbers on each of one of these obstacles to help management plan accordingly.

4. Deal with and quantify systematic risk for your business. This type of business risk is one that impacts markets but cannot be avoided through diversification. These business risks manifest themselves through things like economic recession, interest rates and global conflict. This type of quantification process of attaching numbers to these unforeseen adverse events helps management put in a disaster recovery plan, if the worst possible scenario unfolds.

Tips & Warnings

• Be consistent in your approach to how you are quantifying the various business risks.

References

• The Complete Guide to Business Risk Management; Kit Sadgrove; 2005

Resources

• Business Network