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What Is a SWOT Analysis?

A SWOT analysis is a great business planning and analysis framework designed to help organizations analyze their strengths, weaknesses, opportunities and threats. By assessing these elements of your company, you can explain SWOT analysis to your team and, set yourself apart from your competitors and grow your business.

What Does SWOT Stand For?

The acronym “SWOT” stands for “strengths, weaknesses, opportunities and treats.” Strengths are your core competences as a business, which help set yourself apart from your competitors. Weaknesses are areas where you can improve or where your competitors outperform you. Opportunities are elements of the market that you could potentially use to your advantage, whereas threats are market elements that could cause you problems in the future.

Why Should You Do a SWOT Analysis?

The basic idea behind the analysis is to look at these four elements to see both internal and external factors that could influence your company. By separating positive and negative factors both inside and outside your business into groups and looking at each of these groups of factors separately, you can help reveal new information that you hadn’t previously thought of. This can help you conduct general market analysis, outline a business impact analysis of a new direction in your company or do a thorough customer analysis to help you see your business as your customers see it.

How Should You Do a SWOT Analysis?

SWOT analyses work best in meeting settings. If you run a large company or team, plan a meeting with key players and decision makers. If you run a small independent business, try a brainstorming meeting with your employees or even a trusted friend or mentor. Start by defining your business and setting up a profile of your business as a whole. Then, draw out a square-shaped chart with one of the SWOT groups in each square. This is the standard SWOT market analysis template. Ask for input from each person at the meeting, and add them to the appropriate category. If a suggestion overlaps, add it to the space between two categories.

What Are Questions to Ask During a SWOT Analysis?

Some good topics to bring up during a SWOT analysis are things that your business does best, the price of your products or services, customer feedback, things that help you win sales, things that make you lose sales, your company’s financial position, changes in the market, changes in government policy, local infrastructure and technology. Do as much research as possible before you start the analysis, and print off any supporting material.

How Do You Use a SWOT Analysis?

You can use a SWOT analysis for a number of things. The “Strengths and Weaknesses” sections can help you improve your human resources, customer service policies and other internal company policies so that your company runs smoother and you build a solid reputation with your customers. You can use the “Opportunities and Threats” categories to help you carve out a new marketing strategy or develop new products.


critical risk analysis business plan

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Risk Analysis - A Key Section of Your Business Plan

A professional business plan should include a discussion of business risks and challenges. Although every possible risk will not be identified and addressed, the business plan should discuss the most important ones and indicate how management will mitigate their potential impact on business operations. Identification and discussion of business risks and challenges, and having strategies in place to deal with them strengthens the plan, enhances management’s credibility and increases the confidence potential investors will have in the business plan and its financial projections. Being upfront and discussing potential business risks, rather than glossing over them, builds confidence in the company’s management.

Risk analysis is particularly important for start-ups and small businesses, whose objective in writing a business plan is often to secure capital to start the business, to secure additional working capital for operations or to raise money for expansion. Since they often have more limited operating histories, entrepreneurs and small business managers have not yet demonstrated their ability to cope with business risks. Potential equity investors and lenders expect their business plans to provide assurance that management recognizes these challenges and is prepared to deal with them.

Identification of Risks

The first step in the enterprise risk analysis process is to identify the internal and external threats that may stand the way of achieving planned results. For convenience, these threats can be classified into three broad categories. These are “general business risks” that are faced by all companies, “industry-specific risks” that are faced by companies within the industry and “company-specific risks” faced by the company itself. Within this framework, specific potential risks within each category can be identified and addressed. The major challenges are those that may adversely affect the company’s financial condition, forecast financial results and liquidity.

General Enterprise Business Risks

General enterprise business risks are shared by most businesses but their significance varies by company. In the case of start-ups or early stage companies, management must gain experience in managing operational, marketing and other problems that will arise. Potential threats include unexpected problems that may develop in quality control, distribution, marketing and promotion and other areas. Start-ups and early stage companies must also build relationships with customers and attract customers from competitors. Small but established companies have already gained experience dealing with these problems, reducing this business risk. The risk analysis section should mention these dangers and uncertainties , and the business plan sections relating to each risk category should have strategies to deal with them.

Although all companies face uncertainties associated with the general economic environment, some enterprises are less business cycle sensitive than others. The economic cycle risk of a food company, for example, may be less of a concern than is the case of a construction company. Banks are exposed to interest rate risks but many have in place strategies to mitigate those uncertainties. Some businesses are exposed to challenges posed by higher gasoline prices, while realtors are exposed to risks relating to lower home sales. The important thing is to identify which of these general business challenges could impact the business and have strategies to deal with them. Companies should have strategies to stabilize their business and continue to succeed despite unexpected changes in the economic environment.

The business faces dangers associated with natural disasters. These relate to changes of the weather and their consequences, such as time lost in production and distribution and resultant economic downturns that depress sales.

In the case of companies that offer proprietary products, there are uncertainties associated with ownership of intellectual property. It is important to have trademarked brand name and patent protection to prevent replication of company products or services, which could have an adverse effect on the company and affect the outcome of intellectual property rights disputes.

Industry Specific Risks

The risks and challenges section of the business- or project plan should discuss industry-specific risks. One of those challenges is industry competition. Although it is expected that competition will be mentioned as one of the risks, enterprise strategies for competing effectively should be outlined in the competition and marketing plan sections of the business plan. In the competition section, major competitors and their strengths and weaknesses are discussed, as well as the company’s strategic positioning. In the marketing plan, the company’s action plans for overcoming the competition are outlined.

Some types of businesses are more subject to litigation risks than others. Uncertainties are especially high for companies selling internally consumed products such as food, beverages and pharmaceuticals. Any business that involves customers physically visiting its place of business is vulnerable to “slip and fall” or other types of litigation. Even professionals who have no on-site business can be sued for alleged “errors and omissions” in their advice. The litigation risk is discussed and measures to reduce it, including safety precautions and insurance coverage, can be described to indicate that the risk is known and has been addressed. The company should include the cost of liability insurance in the financial forecasts.

Company Specific Risks

In the case of start-ups, there are uncertainties associated with raising start-up capital and maintaining sufficient funding. In many cases, operations cannot commence until sufficient funds are raised to fund the acquisition of property, plant and equipment and initial working capital requirements.

The risks associated with fixed cost structure of the business are company-specific because they vary from high to low, depending on the nature of the business. In some businesses such as manufacturing, there are high fixed costs because of the large investments in equipment and facilities. Companies with high fixed costs achieve profitability only after the volume of business builds to a point that the fixed costs are covered. Thus, any problems in achieving and maintaining sales levels beyond the breakeven revenue level would have an adverse impact on operating results. The risks and challenges section of the project plan should refer to the marketing section, where strategies to achieve required volumes are discussed. In a service business, this challenge is not as significant, as more costs are variable and can be more easily managed as business volume changes.

All companies have uncertainties associated with recruiting, retaining and managing human resources. In the management and human resources section of the business plan, the company should discuss plans to recruit additional key employees and senior management that are critical to achieving its forecast and operational goals. The risk management section should mention that the company may or may not be successful in obtaining experienced professionals in web site development, operations and other areas but reference sections of the business plan where strategies are outlined to address this issue.

In the case of start-up companies, success of the enterprise will be dependent on the continuing services of only one or two key managers who provide executive leadership. If for any reason these managers were not to fulfill their current leadership roles, the ability of the Company to achieve its forecast results would be adversely affected.

It is important that the business and financial risks be identified and discussed in the enterprise business plan. The informed reader, especially one who may be asked to provide capital for the business, wants to be comfortable that the management has considered potential risks and developed strategies to deal with them. In the process of developing the business plan, identification of potential risks will not only result in a better plan but also better prepare management to successfully manage the enterprise. Readers will have a less favorable view of a written project plan that does not include a risk analysis section than one that demonstrates that management is aware of uncertainties and is prepared to take actions to address any threat.

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Business Plan 101: Critical Risks and Problems

critical risk analysis business plan

When starting a business, it is understood that there are risks and problems associated with development. The business plan should contain some assumptions about these factors. If your investors discover some unstated negative factors associated with your company or its product, then this can cause some serious questions about the credibility of your company and question the monetary investment. If you are up front about identifying and discussing the risks that the company is undertaking, then this demonstrates the experience and skill of the management team and increase the credibility that you have with your investors.  It is never a good idea to try to hide any information that you have in terms of risks and problems.

Identifying the problems and risks that must be dealt with during the development and growth of the company is expected in the business plan. These risks may include any risk related to the industry, risk related to the company, and risk related to its employees. The company should also take into consideration the market appeal of the company, the timing of the product or development, and how the financing of the initial operations is going to occur. Some things that you may want to discuss in your plan includes: how cutting costs can affect you, any unfavorable industry trends, sales projections that do not meet the target, costs exceeding estimates, and other potential risks and problems.  The list should be tailored to your company and product. It is a good idea to include an idea of how you will react to these problems so your investors see that you have a plan.

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6 Critical Risks in a Business Plan

Business plan risks analysis, problem, challenging factors and mitigation strategies.

What is a major example of critical risk in a business plan? Every business is prone to facing certain business risks, which might appear very critical in the real world.

As a business person, you must be able to spend sufficient time in drafting your business plan so that it is capable of addressing the critical risks and assumptions that your business might face.

You should be able to envision and determine, in your business plan, critical risks in a restaurant business plan that might pose a threat to the overall success of your business. When you do not pay enough attention to these risks, it could cause your readers – most important of which are potential investors and bankers – to negatively evaluate your business plan.

Below are some critical business risks and contingencies in a business plan that you must ensure to properly handle before they pose a threat to the success of your business.

Conducting Business Plan Risk Assessment – Business Plan Risk Factors

• Risk of Overestimated Figures

The number one critical business risk that might land your business into problem by getting too much negative attention has to do with figures that have been overestimated. We are talking about high sales profit that seem too optimistic; salaries that appear to be too high or outrageous for a business of its age; and profitability.  These three, if you overestimate the figures, will inadvertently pose as a serious business risk.

For salaries, it will be wise for you to go for the minimum as a startup business, together with any additional incomes that come in the form of profits.

For sales and profits, it will be wise of you to always give figures that appear to be more likely, not figures that seem to match your optimism. Your business’ profitability largely depends on your ability to meet sales projections, and your ability to be able to operate in the confines of your costs. • Risk of Indecisive Conversion Rates

Conversion rate (also hit rate) has to do with the percentage of people, out of the total number of people you approached, that purchased or patronized your product or services. Conversion rate could be best tested through test marketing or pre-selling.

When you test market, it simply means you offer the sales of your product within a particular limited area, for a particular period of time. Usually, you would offer incentives to buyers to encourage them help you outline your actual target customers for your business.

When you pre-sell, you are making introduction of your products or services to prospective customers, and even accepting orders for deliveries.

Your goal is to accurately know the conversion rate such that a reader may be able to take your projected market size, apply the conversion rate, and be able to deduce what the total sales estimate might be. • Risk of Ignored Competition

Here is another critical business risk that many entrepreneurs fail to curtail. As an entrepreneur, you are the master and captain of your game. You are to take charge and seize your market. How do you do that? You are to know every competitor in the industry of your business. Yes, it is an obligation you can never overlook.

Many entrepreneurs feel they know their competitors very well, when in actually reality, they have no real clue as to who their major competitors are. You must ensure you have adequate knowledge of your immediate competitors, as well as substitutes and potential or latent competitors.

If you want to prove your long-term vision for your business, you must always keep abreast with the latest development regarding your competitors. You should even envision businesses that, in later years, might stand as competitors.

• Financial Risk

Most businesses today fold up as a result of financial difficulties. Lack of adequate financial resources is a very critical business risk that might make a business to close.

In most cases, the business runs out of enough money; many customers are taking too long to pay up; unforeseen expenses and too much miscellaneous; accidents and costly financial mistakes could pose a very critical business risk to the business, and even lead to the eventual folding up if the business does not have enough money saved for rainy days to handle such problems.

In your business plan, you should demonstrate that you have adequate financial strength to operate your business until break-even and even after that. Provide the amount of needed investments and loans you will obtain to start and even run the business successfully – even if you are sure your sales volume will generate as much needed money to run the business.

• Risk of Inadequate Payback

When drafting your business plan, it is pertinent to always think about what the readers of your business plan will be expecting. For most people, it is how you intend to pay back the loan or investment you obtained, or the line of credit you hope to obtain from external sources such as banks.

For bankers, they would analyze the business plan critically to understand how exactly you have made plans to settle up the loans or line of credit you want to obtain from the bank. Your cash flows and your collateral issues are highly significant.

In the case of investors, the growth rates and profit margins of the business are highly critical because these are the factors that will actually determine how much they would earn.

For very vital employees, analyzing the business plan helps them have a good grasp of the business’ operation; this in turn would help them envision their future with the business. • Strategic Risk

Another critical business risk factor to your business plan is the strategic risk. Sometimes, your best well-laid business plan might very quickly, actually look so obsolete.

The strategic risk is the business risk that your business strategy might actually become too rigid and no longer efficient in shooting your business to its desired level; your business then starts struggling in order to achieve its business goals.

This business risk could be as a result of a very powerful new competitor in the industry; technological advancement; a shift in the demand of customers; or even a rise in the cost of raw materials or other market changes.

You should take out time to write your business plan such that whenever you face a strategic risk, you should be able to easily tweak your business strategy and adapt, and be able to come up with a viable solution.

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Business Plan Risks How to present your business risks without scaring away investors

By Stever Robbins • Dec 11, 2004

Opinions expressed by Entrepreneur contributors are their own.

Q: I would like to include a risk analysis in my business plan. I don't know how to show risks without sending investors into an anxious frenzy.

A: Any start-up idea will have enough risk to fill a dozen business plans. No investor expects a risk-free plan. Angels and VCs know start-ups are incredibly risky. If they don't, don't take their money--they don't know what they're doing! Most projects fail for reasons that could have been (and sometimes were) predicted far in advance. Since entrepreneurs are optimistic folks by nature: They tend to brush off predictions of doom and charge ahead assuming they will find a way to overcome. You can often avoid the most dire scenarios with intelligent upfront risk planning.

The risk analysis in your plan is to show that you've thought through risks, that you know how to plan for probable risks, and that your plan can survive when things go wrong.

Your plan can address several kinds of risk. You don't need to address every kind of risk in the book, but pick the risk categories that are most relevant to your company and include a paragraph or two about each:

  • Product risk is the risk that the product can't be created. Biotech firms often have a high degree of product risk. They never know for sure they can produce the drug they are hoping to produce.
  • Market risk is the risk that the market will develop differently than expected. Sometimes markets take too long to develop, and cash runs out while a company is waiting for customers.
  • People risk is big in companies that depend on having certain employees or certain kinds of employees. I was with a company that had hired one of the world experts in a certain type of 3-D modeling. It was possible that without this man on board and happy, the company wouldn't be able to create their product.
  • Financial risk is the risk that a company will run out of money or mismanage their money in some way. Finance companies may have huge financial risk, since bad lending policies combined with poor investment policies can sink them.
  • Competitive risk is the risk that a competing product or service will be able to win. Many Web-based businesses have high competitive risk since they can be started with little money and have no way of locking in customers.

What investors want is to know that you are prepared to respond to risks. To the extent possible, outline what your response is to the risk you anticipate. After all, assuming you get funding, those risks may really come to pass. And you will really have to do something about it. By showing investors some of the alternatives you've thought through, you raise their confidence that you'll be able to deal if things don't go according to plan.

For example, consider the risk to a restaurant that people won't come back. What are the reasons you believe that would happen? What can you do to keep that from happening in the first place? It amazes me how many restaurants have a lousy menu selection or bad food and go under without ever asking customers, "Did you enjoy your meal? What could we do to make it better?" An at-the-table survey may be how you propose to avoid having the wrong menu. If things go wrong, you may decide to proactively invite critics to the restaurant for specific feedback on how to make the experience better.

The key is acknowledging that things can go wrong and demonstrating some creativity in finding a solution. You certainly needn't respond to every risk imaginable. Your goal is to provide enough to help your investors feel secure that you have anticipated and dealt with major risks, and they can count on you to handle things that come up once the business is under way.

Stever Robbins is a consultant specializing in mastering overwhelm, power and influence. The author of It Takes a Lot More Than Lead a Stellar Organization , he has been a team member or co-founder of nine startups, an advisor and angel investor, and co-developer of Harvard's MBA program. You can find his other articles and information at .

This article originally appeared on in 2002.

Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.

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Risk Analysis and Risk Management

Assessing and managing risks.

By the Mind Tools Content Team

Risk is made up of two parts: the probability of something going wrong, and the negative consequences if it does.

Risk can be hard to spot, however, let alone to prepare for and manage. And, if you're hit by a consequence that you hadn't planned for, costs, time, and reputations could be on the line. Similarly, overestimating or overreacting to risks can create panic, and do more harm than good.

This makes Risk Analysis an essential tool. It can help you to identify and understand the risks that you could face in your role. In turn, this helps you to manage these risks, and minimize their impact on your plans.

By approaching risk in a logical manner you can identify what you can and cannot control , and tackle potential problems with measured and appropriate action. This can then help to alleviate feelings of stress and anxiety, both in and outside of work.

In this article and video, we look at how you can identify and estimate risks. You will then learn how a strategy of avoiding, sharing, accepting, and controlling can help you to manage risk effectively.

What Is Risk Analysis?

Risk Analysis is a process that helps you to identify and manage potential problems that could undermine key business initiatives or projects. However, it can also be applied to other projects outside of business, such as organizing events or even buying a home!

To carry out a Risk Analysis, you must first identify the possible threats that you face, then estimate their likely impacts if they were to happen, and finally estimate the likelihood that these threats will materialize.

Risk Analysis can be complex, as you'll need to draw on detailed information such as project plans, financial data, security protocols, marketing forecasts, and other relevant information. However, it's an essential planning tool, and one that could save time, money, and reputations.

When to Use Risk Analysis

Risk analysis is useful in many situations:

  • When you're planning projects, to help you to anticipate and neutralize possible problems.
  • When you're deciding whether or not to move forward with a project.
  • When you're improving safety and managing potential risks in the workplace.
  • When you're preparing for events such as equipment or technology failure, theft, staff sickness, or natural disasters.
  • When you're planning for changes in your environment, such as new competitors coming into the market, or changes to government policy.

How to Use Risk Analysis

To carry out a risk analysis, follow these steps:

1. Identify Threats

The first step in Risk Analysis is to identify the existing and possible threats that you might face. These can come from many different sources. For instance, they could be:

  • Human – Illness, death, injury, or other loss of a key individual.
  • Operational – Disruption to supplies and operations, loss of access to essential assets, or failures in distribution.
  • Reputational – Loss of customer or employee confidence, or damage to market reputation.
  • Procedural – Failures of accountability, internal systems, or controls, or from fraud.
  • Project – Going over budget, taking too long on key tasks, or experiencing issues with product or service quality.
  • Financial – Business failure, stock market fluctuations, interest rate changes, or non-availability of funding.
  • Technical – Advances in technology, or from technical failure.
  • Natural – Weather, natural disasters, or disease.
  • Political – Changes in tax, public opinion, government policy, or foreign influence.
  • Structural – Dangerous chemicals, poor lighting, falling boxes, or any situation where staff, products, or technology can be harmed.

Note: It is vital that you consider any and all risks to your team members. Managers and leaders have a duty of care , and so will have legal and moral obligations to keep their employees safe.

You can use a number of different approaches to carry out a thorough analysis:

  • Run through a list such as the one above to see if any of these threats are relevant.
  • Think about the systems, processes, or structures that you use, and analyze risks to any part of these. What vulnerabilities can you spot within them?
  • Ask others who might have different perspectives. If you're leading a team, ask for input from your people, and consult others in your organization, or those who have run similar projects.

Tools such as SWOT Analysis , Failure Mode and Effects Analysis , PMESII-PT , and PEST Analysis can also help you uncover threats, while Scenario Analysis helps you to explore possible future threats.

Tip: Be mindful not to confuse Risk Analysis with Risk Assessment. The latter is the process of formally analyzing and mitigating the risks and hazards of an activity by an employee for their health and safety.

2. Estimate Risk

Once you've identified the threats you're facing, you need to calculate both the likelihood of these threats being realized, and their possible impact.

One way of doing this is to make your best estimate of the probability of the event occurring, and then to multiply this by the amount it will cost you to set things right if it happens. This gives you a value for the risk:

Risk Value = Probability of Event x Cost of Event

As a simple example, imagine that you've identified a risk that your rent may increase substantially.

You think that there's an 80 percent chance of this happening within the next year, because your landlord has recently increased rents for other businesses. If this happens, it will cost your business an extra $500,000 over the next year.

So the risk value of the rent increase is:

0.80 (Probability of Event) x $500,000 (Cost of Event) = $400,000 (Risk Value)

You can also use a Risk Impact/Probability Chart to assess risk. This will help you to identify which risks you need to focus on.

Tip: Don't rush this step. Gather as much information as you can so that you can accurately estimate the probability of an event occurring, and the associated costs. Use past data as a guide if you don't have an accurate means of forecasting.

How to Manage Risk

Once you've identified the value of the risks you face, you can start to look at ways of managing them.

Tip: Look for cost-effective approaches – it's rarely sensible to spend more on eliminating a risk than the cost of the event if it occurs. It may be better to accept the risk than it is to use excessive resources to eliminate it.

Be sensible in how you apply this, though, especially if ethics or personal safety are in question.

Avoid the Risk

In some cases, you may want to avoid the risk altogether. This could mean not getting involved in a business venture, passing on a project, or skipping a high-risk activity. This is a good option when taking the risk involves no advantage to your organization, or when the cost of addressing the effects is not worthwhile.

Remember that when you avoid a potential risk entirely, you might miss out on an opportunity. Conduct a "What If?" Analysis to explore your options when making your decision.

Share the Risk

You could also opt to share the risk – and the potential gain – with other people, teams, organizations, or third parties.

For instance, you share risk when you insure your office building and your inventory with a third-party insurance company, or when you partner with another organization in a joint product development initiative.

Accept the Risk

Your last option is to accept the risk. This option is usually best when there's nothing you can do to prevent or mitigate a risk, when the potential loss is less than the cost of insuring against the risk, or when the potential gain is worth accepting the risk.

For example, you might accept the risk of a project launching late if the potential sales will still cover your costs.

Before you decide to accept a risk, conduct an Impact Analysis to see the full consequences of the risk. You may not be able to do anything about the risk itself, but you can likely come up with a contingency plan to cope with its consequences.

However, it's important to bear in mind that everyone's definition of "acceptable risk" is different, so be sure to communicate with others before you make a decision, and use tools like the Prospect Theory to predict people's different reactions to risk.

Control the Risk

If you choose to accept the risk, there are a number of ways in which you can reduce its impact.

Business Experiments are an effective way to reduce risk. They involve rolling out the high-risk activity but on a small scale, and in a controlled way. You can use experiments to observe where problems occur, and to find ways to introduce preventative and detective actions before you introduce the activity on a larger scale.

  • Preventative action involves aiming to prevent a high-risk situation from happening. It includes health and safety training, firewall protection on corporate servers, and cross-training your team.
  • Detective action involves identifying the points in a process where something could go wrong, and then putting steps in place to fix the problems promptly if they occur. Detective actions include double-checking finance reports, conducting safety testing before a product is released, or installing sensors to detect product defects.

Plan-Do-Check-Act is a similar method of controlling the impact of a risky situation. Like a business experiment, it involves testing possible ways to reduce a risk. The tool's four phases guide you through an analysis of the situation, creating and testing a solution, checking how well this worked, and implementing the solution.

Alternatively, James Reason's Swiss Cheese Model of System Accidents explores how there is no single solution to minimizing risk, but rather uses a combination of methods to get the best results.

Risk Analysis is a proven way of identifying and assessing factors that could negatively affect the success of a business or project. It allows you to examine the risks that you or your organization face, and helps you decide whether or not to move forward with a decision.

You perform a Risk Analysis by identifying threats, and estimating the likelihood of those threats being realized.

Once you've worked out the value of the risks you face, you can start looking at ways to manage them effectively. This may include choosing to avoid the risk, sharing it, or accepting it while reducing its impact. Not only can this help you to make sensible decisions but it can also alleviate feelings of stress and anxiety.

It's essential that you're thorough when you're working through your Risk Analysis, and that you're aware of all of the possible impacts of the risks revealed. This includes being mindful of costs, ethics, and people's safety.

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Hi, there is no option to download the tools 'print this free worksheet, and then follow these steps'. Can you please advise me how to download this free risk assessment template?

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critical risk analysis business plan

How to Conduct a Risk Analysis for Your Small Business

Small business owners take risks every day. But if you put too much at stake, your business bottom line could suffer. To make sure your decisions are sound, conduct a risk analysis for your small business.

What is a risk analysis in business?

A risk is a situation that can either have huge benefits or cause serious damage to a small business’s financial health. Sometimes a risk can result in the closure of a business. Before taking risks at your business, you should conduct a risk analysis.

A risk assessment for small business is a strategy that measures the potential outcomes of a risk. The assessment helps you make smart business decisions and avoid financial issues.

Jason Olsen, serial entrepreneur and founder of Studios 360, Prestman Auto, and Automobia, explained in his article :

The key is to not only use optimism for reasons to take action, but also to utilize risk factors you uncover to guide your decisions. Yes, you must have courage to bet on your ideas, but you must also have the ability to take a thoughtful, calculated approach. It’s nearly impossible to remove all risk in any scenario, but what’s important is to make sure these troublesome areas are always considered and understood.”

Internal vs. external risks

Usually, a risk is either internal or external. Internal risks occur inside of your operations, while external risks occur outside of your business.

Internal risks are often more specific to your business and easier to control than external risks. Examples of internal risks include:

  • Financial risks
  • Marketing risks
  • Operational risks
  • Workforce risks

Though you can project external risks, they are usually out of your control. You might need to take a reactive approach to managing external risks. These risks include:

  • Changing economy
  • New competitors
  • Natural disasters
  • Government regulations
  • Consumer demand changes

How to do a risk assessment

There is no one way to assess business risk. The assessment is not 100% accurate when it comes to judging your level of risk. A small business risk analysis gives you a picture of the possible outcomes your business decisions could have. Use the following steps to do a financial risk assessment.

Step 1: Identify risks

The first step to managing business risks is to identify what situations pose a risk to your finances. Consider the damage a risk could have on your business. Then, think about your goals and the rewards that could come out of taking the risk. Depending on your business, location, and industry, risks will vary.

Step 2: Document risks

Once you have a list of potential business risks, define them in a document. Develop a process to weigh the effect of each risk. Look at how much damage the risk could potentially cause and how hard it would be to recover. Set up a scoring system for risks, from mild to severe.

Step 3: Appoint monitors

Identify individuals at your business who will keep an eye on and manage risks. The risk monitor might be you, a partner, or an employee. Decide how risks should be reported and handled. When you have procedures for risk management , issues can be taken care of smoothly.

Step 4: Determine controls

After understanding potential risks, figure out controls you can use to reduce them. Look at patterns over time to predict your income cycle. And, assess the impact risks have on your business. Look at the significance of a risk as well as its likelihood of occurring at your business.

Step 5: Review periodically

Your business risk assessment is not a one-time commitment. Review risk management processes annually to see how you handle risks. Also, look out for new risks that might not have been relevant in the previous assessment.

Use a risk ratio to gauge risk

A risk ratio shows the relationship between your business’s debts and equity. Business debt creates risk. By comparing debt, or leverage, to equity, you get a better understanding of your business’s level of risk. This can help you set more targeted business debt management goals.

Debt-to-equity ratio

There are different kinds of financial leverage ratios. One common leverage ratio formula is the debt-to-equity ratio . For this ratio, divide your total debt by your total equity. Business equity is equal to your assets minus liabilities and shows your ownership in the business.

Debt-to-Equity Ratio = Total Debt / Total Equity

For example, you have $30,000 in debt and $15,000 in equity.

$30,000 / $15,000 = 2 times or 200%

This means for every dollar you have, you owe two dollars to creditors.

By finding the debt-to-equity ratio, you can see how much capital comes from debt. The more debt you have compared to equity, the bigger your risk level.

Purpose of risk assessments

Risk assessments are an important part of running your business. You can use your business risk assessment for making decisions and financing your business .

A simple risk analysis will help you avoid hazards that could damage your finances. The assessment informs you about the steps you need to take to protect your business. You can see what situations you need to address and avoid.

Beyond internal use, a financial risk assessment can help you prepare to talk with lenders. These individuals want to know your business’s level of risk before giving you money. They look at the likelihood of your business growing and how likely you are to pay back the loan.

Need help keeping track of your business debts, income, and expenses? Patriot’s online accounting software is easy to use and made for the non-accountant. We offer free, USA-based support. Try it for free today.

This article is updated from its original publication date of May 9, 2017.

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Global Risk Guard. Resources for Risk Professionals

How To Do Risk Analysis In Your Business Plan

When creating a professional business plan, it is important to ensure that it includes the risks and challenges. While it is not possible to identify and address every risk, highlighting and discussing the most important ones is important. This will help the management to come up with ways to mitigate the potential impact of the risks on the business operations. Apart from identifying and discussing the risks and challenges, the plan should also involve coming up with strategies to deal with them.

A good business plan will enhance credibility, while also increasing the confidence that potential investors have in the business and its financial projections. It is important to be honest when discussing the potential business risks. Trying to gloss over the issues can lead to lack of confidence in the management. Risk analysis is especially important for small businesses and startups that are trying to secure capital for expansion or for ongoing operations.

Identifying business risks

The process of enterprise risk analysis begins with identifying the external and internal threats that can inhibit achieving the planned results. The threats can be grouped into three categories, namely “general business risks” that all companies face, “industry-specific risks” that affect businesses within specific industries and “company-specific risks” that the particular company faces. You can identify and address the potential risks in each category. The major risks are those which have an adverse effect on the company’s liquidity, financial condition and the forecast financial results.

General business risks

Most businesses share the general business risks, but their effects or significance often varies by company. New businesses or startups must gain the required experience in managing marketing, operational and other issues that will arise. Some potential threats include problems that can develop during marketing, quality control, promotion, distribution and other areas. The start-ups and companies in the early stages need to attract and build relationships with customers from their competitors. Established companies will have different similar problems but some are more vulnerable than others.

Industry specific challenges

There are challenges and risks that are industry-specific and it is important for businesses to identify what they are. One major challenge is the issue of industry competition. While this may be a common challenge, the business plan should address what the business can do to compete effectively. It is important to discuss marketing strategies while also discussing major competitors and identifying their strengths and weaknesses. The company’s action plans to deal with the competition are given.

Company specific risks

There are risks and uncertainties associated with different companies including recruitment issues. The risks are different depending on the stage the company is in. Startups will often have issues when it comes to obtaining start-up or working capital, which effectively affects operations. There are also risks that are associated with the business fixed cost structure and they can vary depending on the company. Some companies have high fixed costs due to the large investments in facilities and equipment.

As you can see, it is very important to ensure that financial and business risks are identified and discussed fully in the business plan . If you lack experience in this area, it might be worth to consider getting professional help from business financial advisors to support the task of conducting a risk analysis.

  • Cross Asset Quantitative Analyst – Start Up – London, United Kingdom

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Uncovering Hidden Risks: A Comprehensive Guide to Business Plan Risk Analysis

Risk Management Process - Business Plan

A modern business plan that will lead your business on the road to success must have another critical element. That element is a part where you will need to cover possible risks related to your small business. So, you need to focus on  managing risk  and use  risk management processes  if you want to succeed as an entrepreneur.

How can you manage risks?

You can always plan and  predict  future things in a certain way that will happen, but your impact is not always in your hands. There are many  external factors  when it comes to the business world. They will always influence the realization of your plans. Not only the realization but also the results you will achieve in implementing the specific plan. Because of that, you need to look at these factors through the prism of the risk if you want to implement an appropriate management process while implementing your business plan.

By conducting a thorough risk analysis, you can manage risks by identifying potential threats and uncertainties that could impact your business. From market fluctuations and regulatory changes to competitive pressures and technological disruptions, no risk will go unnoticed. With these insights, you can develop contingency plans and implement risk mitigation strategies to safeguard your business’s interests.

This guide will provide practical tips and real-life examples to illustrate the importance of proper risk analysis. Whether you’re a startup founder preparing a business plan or a seasoned entrepreneur looking to reassess your risk management approach, this guide will equip you with the knowledge and tools to navigate the complex landscape of business risks.

Why is Risk Analysis Important for Business Planning?

Risk analysis is essential to business planning as it allows you to proactively identify and assess potential risks that could impact your business objectives. When you conduct a comprehensive risk analysis, you can gain a deeper understanding of the threats your business may face and can take proactive measures to mitigate them.

One of the key benefits of risk analysis is that it enables you to prioritize risks based on their potential impact and likelihood of occurrence . This helps you allocate resources effectively and develop contingency plans that address the most critical risks.

Additionally, risk analysis allows you to identify opportunities that may arise from certain risks , enabling you to capitalize on them and gain a competitive advantage.

It is important to adopt a systematic approach to effectively analyze risks in your business plan. This involves identifying risks across various market, operational, financial, and legal areas. By considering risks from multiple perspectives, you can develop a holistic understanding of your business’s potential challenges.

What is a Risk for Your Small Business?

In dictionaries, the risk is usually defined as:

The possibility of dangerous or bad consequences becomes true .

When it comes to businesses,  entrepreneurs,  or in this case, the business planning process, it is possible that some aspects of the business plan will not be implemented as planned. Such a situation could have dangerous or harmful consequences for your small business.

It is simple. If you don’t implement something you have in your business plan, there will be some negative consequences for your small business.

Here is how you can  write the business plan in 30 steps .

Types of Risks in Business Planning

When conducting a business risk assessment for your business plan, it is essential to consider various types of risks that could impact your venture. Here are some common types of risks to be aware of:

1. Market risks

These risks arise from fluctuations in the market, including changes in consumer preferences, economic conditions, and industry trends. Market risks can impact your business’s demand, pricing, and market share.

2. Operational risk

Operational risk is associated with internal processes, systems, and human resources. These risks include equipment failure, supply chain disruptions, employee errors, and regulatory compliance issues.

3. Financial risks

Financial risks pertain to managing financial resources and include factors such as cash flow volatility, debt levels, currency fluctuations, and interest rate changes.

4. Legal and regulatory risks

Legal and regulatory risks arise from changes in laws, regulations, and compliance requirements. Failure to comply with legal and regulatory obligations can result in penalties, lawsuits, and reputational damage.

5. Technological risks

Technological risks arise from rapid technological advancements and the potential disruptions they can cause your business. These risks include cybersecurity threats, data breaches, and outdated technology infrastructure.

Basic Characteristics of Risk

Before you start with the development of your small  business risk  management process, you will need to know and consider the essential characteristics of the possible risk for your company.

What are the basic characteristics of a possible risk?

The risk for your company is partially unknown.

Your  entrepreneurial work  will be too easy if it is easy to predict possible risks for your company. The biggest problem is that the risk is partially unknown. Here we are talking about the future, and we want to prepare for that future. So, the risk is partially unknown because it will possibly appear in the future, not now.

The risk to your business will change over time.

Because your businesses operate in a highly dynamic environment, you cannot expect it to be something like the default. You cannot expect the risk to always exist in the same shape, form, or consequence for your company.

You can predict the risk.

It is something that, if we want, we can predict through a  systematic process . You can easily predict the risk if you install an appropriate risk management process in your small business.

The risk can and should be managed.

You can always focus your resources on eliminating or reducing risk in the areas expected to appear.

risk management in business plan

Risk Management Process You Should Implement

The risk management process cannot be seen as static in your company. Instead of that, it must be seen as an interactive process in which information will continuously be updated and analyzed. You and your small business members will act on them, and you will review all risk elements in a specified period.

Adopting a systematic approach to identifying and assessing risks in your business plan is crucial. Here are some steps to consider:

1. Risk Identification

First, you must identify risk areas . Ask and respond to the following questions:

  • What are my company’s most significant risks?
  • What are the risk types I will need to follow?

In business, identifying risk areas is the process of pinpointing potential threats or hazards that could negatively impact your business’s ability to conduct operations, achieve business objectives, or fulfill strategic goals.

Just as meteorologists use data to predict potential storms and help us prepare, you can use risk identification to foresee possible challenges and create plans to deal with them.

Risk can arise from various sources, such as financial uncertainty, legal liabilities, strategic management errors, accidents, natural disasters, and even pandemic situations. Natural disasters can not be predicted or avoided, but you can prepare if they appear.

For example, a retail business might identify risks like fluctuating market trends, supply chain disruptions, cybersecurity threats, or changes in consumer behavior. As you can see, the main risk areas are related to types of risk: market, financial, operational, legal and regulatory, and technological risks.

You can also use business model elements to start with something concrete:

  • Value proposition,
  • Customers ,
  • Customers relationships ,
  • Distribution channels,
  • Key resources and
  • Key partners.

It is not necessarily that there will be risk in all areas and that the risk will be with the same intensity for all areas. So, based on your business environment, the industry in which your business operates, and the business model, you will need to determine in which of these areas there is a possible risk.

Also, you must stay informed about external factors impacting your business, such as industry trends, economic conditions, and regulatory changes. This will help you identify emerging risks and adapt your risk management strategies accordingly.

The idea for this step is to create a table where you will have identified potential risks in each important area of your business.

Business Risks Identification

2. Risk Profiling

Conduct a detailed analysis of each identified risk, including its potential impact on your business objectives and the likelihood of occurrence. This will help you develop a comprehensive understanding of the risks you face.

Qualitative Risk Analysis

The qualitative risk analysis process involves assessing and prioritizing risks based on ranking or scoring systems to classify risks into low, medium, or high categories. For this analysis, you can use customer surveys or interviews.

Qualitative risk analysis is quick, straightforward, and doesn’t require specialized statistical knowledge to conduct a business risk assessment. The main negative side is its subjectivity, as it relies heavily on thinking about something or expert judgment.

This method is best suited for initial risk assessments or when there is insufficient quantitative analysis data .

For example, if we consider the previously identified risk of a sudden shift in consumer preferences, a qualitative analysis might rate its likelihood as 7 out of 10 and its impact as 8 out of 10, placing it in the high-priority quadrant of our risk matrix. But, qualitative analysis can also use surveys and interviews where you can ask open questions and use the qualitative research process to make this scaling. This is much better because you want to lower the subjectivism level when doing business risk assessment.

Quantitative Risk Analysis

On the other side, the quantitative risk analysis method involves numerical and statistical techniques to estimate the probability and potential impact of risks. It provides more objective and detailed information about risks.

Quantitative risk analysis can provide specific, data-driven insights, making it easier to make informed decisions and allocate resources effectively. The negative side of this method is that it can be time-consuming, complex, and requires sufficient data.

You can use this approachfor more complex projects or when you need precise data to inform decisions, especially after a qualitative analysis has identified high-priority risks.

For example , for the risk of currency exchange rate fluctuations, a quantitative analysis might involve analyzing historical exchange rate data to calculate the probability of a significant fluctuation and then using your financial data to estimate the potential monetary impact.

Both methods play crucial roles in effectively managing risks. Qualitative risk analysis helps to identify and prioritize risks quickly, while quantitative analysis provides detailed insights for informed decision-making.

3. Business Risk Assessment Matrix

Once you have identified potential risks and analyzed their likelihood and potential impact, you can create a business risk assessment matrix to evaluate each risk’s likelihood and impact. This matrix will help you prioritize risks and allocate resources accordingly.

A business risk assessment matrix, sometimes called a probability and impact matrix, is a tool you can use to assess and prioritize different types of risks based on their likelihood (probability) and potential damage (impact). Here’s a step-by-step process to create one:

  • Step 1: Begin by listing out your risks . For our example, let’s consider four of the risks we identified earlier: a sudden shift in consumer preferences (Market Risk), currency exchange rate fluctuations (Financial Risk), an increase in the minimum wage (Legal), and cybersecurity threats (Technological Risk).
  • Step 2: Determine the likelihood of each risk occurring . In the process of risk profiling, we’ve determined that a sudden shift in consumer preferences is highly likely, currency exchange rate fluctuations are moderately likely, an increase in the minimum wage, and cybersecurity threats are less likely but still possible.
  • Step 3: Assess the potential impact of each risk on your business if it were to occur . In our example, we might find that a sudden shift in consumer preferences could have a high impact, currency exchange rate fluctuations a moderate impact, an increase in minimum wage minor impact, and cybersecurity threats a high impact.
  • Step 4: Plot these risks on your risk matrix . The vertical axis represents the likelihood (high to low), and the horizontal axis represents the consequences (high to low).

Risk Assessment Matrix

By visualizing these risks in a risk assessment matrix format, you can more easily identify which risks require immediate attention and which ones might need long-term strategies.

4. Develop Risk Indicators for Each Risk You Have Identified

The question is, how will you measure the business risks for your company?

Risk indicators are metrics used to measure and predict potential threats to your business. Simply, a risk indicator is a measure that should tell you whether the risk appears or not in a particular area you have defined previously. They act like a business’s early warning system. When these indicators change, it’s a signal that the risk level may be increasing.

For example, for distribution channels, an indicator can be a delay in delivery for a minimum of three days. This indicator will tell you something is wrong with that channel, and you must respond appropriately.

Now, let’s consider some risk indicators for the risks we have already identified and analyzed:

Risk Indicators

If you conduct all the steps until now, you can have a similar table with risk indicators in your business plan. You should monitor these indicators regularly, and if you notice a significant change, such as a drop in sales or an increase in attempted breaches, it’s time to investigate and take some action steps. This might involve updating your product line, hedging against currency risk, budgeting for higher wages, or improving your cybersecurity measures.

Remember, risk indicators can’t predict the future with certainty. But they can give you valuable insights that can help you prepare for potential threats.

5. Define Possible Action Steps

The question is, what can you do regarding the risk if the risk indicator tells you that there is a potential risk?

Once the risk has appeared and is located, it is time to take concrete action steps. The goals of this step are not only to reduce or eliminate the impact of the risk for your company but also to prevent them in the future and reduce or eliminate their influence on the business operations or the execution of your business plan.

For example, for distribution channels with delivery delayed more than three days, possible activities can be the following:

  • Apologizing to the customers for the delay,
  • Determining the reasons for the delay,
  • Analysis of the reasons,
  • Removing the reasons,
  • Consideration of alternative distribution channels, etc.

In this part of the business plan for each risk area and indicator, try to standardize all possible actions. You can not expect that they will be final. But, you can cover some basic guidelines that must be implemented if the risk appears. Here is an example of how this part will look in your business plan related to risks we have already identified through the risk assessment process.

Action Steps When Risk Appear

6. Monitoring

Because this risk management process is dynamic , you must apply the monitoring process. In such a way, you can ensure the elimination of a specific kind of risk in the future, and you will allocate your resources to new possible risks.

After implementing the actions, you need to ask yourself the following questions:

  • Are the actions taken regarding the risk the proper measures?
  • Can you improve something regarding the risk management process? Is there a need for new risk indicators?

Techniques and Tools for Business Plan Risk Assessment

Various risk analysis methods, techniques, and tools are available to conduct an effective risk analysis for your business plan. Here are some commonly used ones:

1. SWOT analysis

A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis can help you identify internal strengths and weaknesses and external opportunities and threats. This analysis provides valuable insights into possible business risks and opportunities.

2. PESTEL analysis

A PESTEL (Political, Economic, Sociocultural, Technological, Environmental, Legal) analysis assesses the external factors that could impact your business. This analysis will help you identify risks and opportunities arising from these factors.

3. Scenario analysis

Consider different scenarios that could impact your business, such as best-case, worst-case, and most likely scenarios, as a part of your risk assessment process. You can anticipate potential risks and develop appropriate response strategies by analyzing these scenarios.

4. Monte Carlo simulation

Monte Carlo simulation uses random sampling and probability distributions to model various scenarios and assess their potential impact on your business. This technique provides you with a more accurate understanding of risk exposure.

5. Risk register

A risk register is a risk analysis tool that helps you record and track identified risks and their relevant details, such as impact, likelihood, mitigation strategies, and responsible parties. This tool ensures that risks are appropriately managed and monitored.

6. Business Impact Analysis (BIA)

Business impact analysis helps you understand the potential effects of various disruptions on your business operations and objectives. It’s about identifying what could go wrong and understanding how it could impact your bottom line. So, you can conduct business impact analysis as a part of your risk assessment inside your business plan.

7. Failure Mode and Effects Analysis (FMEA)

Using FMEA in your risk assessment process, you can proactively address potential problems, ensuring your business operations run as smoothly as you planned. It’s all about preparing for the worst while striving for the best.

8. Risk-Benefit Analysis (RBA)

The risk-benefit analysis allows you to make informed decisions, balancing the potential for gain against the potential for loss. It helps you choose the best path, even when the way forward isn’t entirely clear. This tool is a systematic approach to understanding the specific business risk and benefits associated with a decision, process, or project.

9. Cost-Benefit Analysis

By conducting a cost-benefit analysis as a part of your risk assessments, you can make data-driven decisions that consider both the possible risks (costs) and rewards (benefits). This approach provides a clear picture of the potential return on investment, enabling more effective and confident decision-making.

These techniques and tools allow you to conduct a comprehensive risk analysis for your business plan.

Mitigating and Managing Risks in a Business Plan

Identifying risks in your business plan is only the first step. To ensure the success of your venture, it is crucial to develop effective risk mitigation and management strategies. Here are some critical steps to consider:

  • Risk avoidance : Some risks may be too high to justify taking. In such cases, consider avoiding these risks altogether by adjusting your business plan or exploring alternative strategies.
  • Risk transfer : Transferring risks to third parties, such as insurance companies or outsourcing partners, can help mitigate their impact on your business. Evaluate opportunities for risk transfer and consider appropriate insurance coverage.
  • Risk reduction : Implement measures to reduce the likelihood and impact of identified risks. This may involve improving internal processes, implementing safety protocols, or diversifying your supplier base .
  • Risk acceptance : Some risks may be unavoidable or negatively impact your business. In such cases, accepting the risks and developing contingency plans can help minimize their impact.

In conclusion, a comprehensive risk analysis is essential for identifying, assessing, and managing different types of risk that could impact your success.

Conducting a thorough risk analysis can safeguard your business’s interests, capitalize on opportunities, and increase your chances of long-term success.

Dragan Sutevski

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