Business risk assessment: what it is & why you need it
What is a business risk assessment?
A business risk assessment helps you identify, analyse and prioritise risks. Businesses use risk assessments to:
protect against potential threats
Risk assessment for business plan
When you’re putting together a business plan, it’s important to include a business risk assessment. Completing this section helps business owners to:
understand what risks they face
develop strategies for minimising or eliminating those risks
allocate resources effectively to manage risks
monitor and review risks on an ongoing basis.
This means that the business owner has a documented strategy in place to handle when things can — and do — go wrong. This gives them better control over the business and its trajectory, while also giving potential investors assurance that the business is well managed and their investment is sound.
The different types of risks businesses face
While it may be difficult to catalogue every risk a business may face, you can do a risk assessment based on types of risk. These categories may include:
These are risks from dangerous workplace situations that could cause harm to people, property or the environment. Examples include fires, floods and chemical spills.
This risk comes from choosing one opportunity over another. When you dedicate your resources to one opportunity, there’s always the chance that a better one will come along or the current one won’t go as planned. Examples include investing in a new product line or moving to a new location.
This risk is present when the outcome of a situation is uncertain. Examples of business risks include legal action, damage from natural disasters, and the loss of important customers or suppliers.
This type of risk comes from the day-to-day running of your business. Examples of operational risk may include equipment failure, employee error or theft.
A risk to your business' reputation can include negative media coverage, product recalls and data breaches.
Cyber security is a risk for all businesses, including small and medium-sized organisations. Any data loss, leak or compromise can cost a business severely — both financially and in reputational damage.
How to do a business risk assessment (plus template and example)
1. Identify the different types of risks for your business.
To identify the risks to your business, consider what could go wrong and why that might happen. Consider holding brainstorming sessions with your employees or reviewing past incidents to get started.
2. Assess the likelihood and potential impact of each type of risk.
You’ll want to decide the likelihood and potential impact of each type of risk. For example, the risk may be unlikely to occur through to very likely to occur. Likewise, the impact of the risk may be negligible through to severe. Doing this assessment will help you decide what to prioritise and where to allocate resources.
3. Prioritise the risks and develop strategies for mitigating them.
Once you’ve identified and assessed your risks, you’ll need to develop strategies to mitigate them and lessen their potential negative impact. This could involve taking out adequate business insurance or putting business continuity plans in place.
Business risk assessment template
The Australian Taxation Office (ATO) has developed a business risk assessment template that you can use for your risk assessment.
The template includes questions to help you identify and assess risks.
Business risk assessment example
If you own a small business, you might not think you need to worry about conducting risk assessments. But all businesses can face risks that could significantly affect their operations. Consider the following example:
You own a small retail business with one store. Your primary source of income is from selling products online, but you also have a small number of customers who visit your store in person.
A customer tells you they see a mouse in your store. This is a reputational risk, as it could damage your business’ reputation if word gets out. It’s also an operational risk if it leads to damaged inventory.
In this case, you'd need to assess the likelihood of that risk and the potential damage it could do to your business reputation or operations. Based on this assessment, you can decide how best to deal with the risk.
This is just one example of the innumerable risks businesses can face. Conducting a thorough business risk assessment prepares you for just about anything that comes your way.
Tips for mitigating risk in your business
Risk is part of life — it can’t always be avoided, but there are strategies you can put in place to mitigate its impacts. Consider the following:
Have adequate insurance coverage to help mitigate the financial impact of risks such as fire, theft or liability.
Develop contingency plans so that you can continue operating if an incident, such as a natural disaster or power outage, occurs.
Implement risk management processes and procedures. This could involve anything from regular risk assessments to employee training on identifying and dealing with potential risks.
Regularly monitor and review risks and make sure you have effective mitigation strategies in place.
Maintain good relationships with suppliers and customers. This can help to minimise the impact of risks such as supply chain disruptions. Also, ask for feedback on their experience with your products or services, so you can identify potential risks before they become major problems.
Have strong internal financial controls and IT security measures.
Stay up to date on changes in laws and regulations. This will help you avoid compliance-related issues, including risks specific to your industry and general risks all businesses face.
Disclaimer: This is general advice not meant to replace professional guidance. When seeking out someone to help advise you on business decisions, find somebody with the accreditations to assist you.
Minimise your IT risk with MYOB
With MYOB’s business management platform, you can look after your finances, invoices, payroll and more, while maintaining compliance and data security at all times. Our cloud-based software is scalable and affordable, catering for sole traders through to mid-sized enterprises. With MYOB, your IT is future fit — so you have one less thing to worry about.
Sign up today and try FREE for 30 days.
How to define key performance indicators (KPIs) for employees
How to perform a business gap analysis
Business expenses guide for SMBs