How to Evaluate Risk in Business

Calculating risk is essential during any business venture. Besides helping you avoid costly oversights, it may make it easier to secure funding for your aspirations by proving you’re trying to avoid mishaps.

Identify as Many Risks as Possible

Begin by making a list of as many potential risks as you can. They may involve things like poor economic conditions, difficulty finding a supplier or the launch of a new product that isn’t well received.

Calculate Losses and Assign Monetary Values

Add each potential loss to a spreadsheet and give each a percentage that indicates the likelihood of risk. For example, 25 percent represents a small chance of the risk occurring, and 75 percent indicates a high likelihood it will happen.

Next, estimate a dollar amount for each risk. The total amount should be added to the amount of total losses you expect to have for this fiscal year.

Weigh the Possible Outcomes

It’s now time to decide whether the risks you’ve calculated are worth taking. Do that by comparing the gains you’d get if taking a risk goes in your favor, versus what you’d lose if it does not.

For example, maybe you hope to begin a project that could result in $5,000 worth of losses if it fails. However, if a successful result would bring $26,000 worth of revenue, it’s probably worth taking this risk.

Do What You Can to Minimize Risk

Once you are aware of which risks you face and the effects each one may have, do everything in your power to reduce the risk.  If you’re worried about finding a supplier for a new lightweight, waterproof material you need to make a new kind of raincoat, for example, start your search as far in advance as possible and try to negotiate a long-term contract once you find a candidate.

Risk is arguably one of the most nerve-wracking elements of starting or running a business. However, making the calculations above could put the odds in your favor.