Financial Statement Analysis: The Many Factors of Business Risk Analysis

The Many Factors of Business Risk Analysis

The Many Factors of Business Risk Analysis
The Many Factors of Business Risk Analysis

Author: John R. Daly


What is Risk Analysis?

Risk Analysis is essential to keeping a company or organization on track and predicting any variables that may threaten or cause the company a debt. It ensures that an organization’s objectives and outcomes are achieved, despite a large selection of risks that may arise.

According to the author, John R. Daly,  to manage your business processes, one first must establish and understand what they are.

Risk analysis is a form of recognizing business needs and determining solutions to business problems.
Solutions often include process mapping, process improvement, change management, and identifying potential risks.
One main goal of business process analysis is to improve the flow of information, documentation, and innovative thinking throughout the organization.  The sharing of information within an organization will affect the group and personal responsibilities, market strategies, and the allocation of tasks.

The key elements for a successful risk analysis plan must always be under internal review. Also, measuring its effectiveness to detect and correct the forms of risk that will jeopardize your business.

Risk Analysis is an examination of the probability that the outcome of the business plan will lead to the desired results.
Usually risk analysis is a structured methodology in comparing two or more alternative scenarios, action plan, policies, etc.
As Mr. Daly states, identifying risks and constraints beforehand provides time to mitigate those that can be corrected informing those involved, both verbally and in writing that the integrity of the business may be in jeopardy.

The first step of risk analysis is critical in that it will help one conduct an analysis of risk inherent in the company or organization. This first step requires the use of analysis tools or matrices that are already in place by your organization to determine forms of risk threatening your organization. Examples of these tools can include contracts, policies, and procedures, flowcharts, compliance reviews, and loss history reports.

One example of how to identify a risky business is to evaluate thoroughly accident reports to employees that have been injured on the job. If one sees any pattern or trend to workplace injuries, one has already identified an inherent risk in the company that can be prevented in the future. A company by taking immediate corrective action can avoid this risk in the future.

Risk analysis, as Mr. Daly explains, is an essential step in the risk management process. In this step, one will have a more mundane task of breaking down the potential risk. Use qualitative data as the basis for the mathematical analysis.

Experienced international businesses engage in political risk analysis, a systematic analysis of the political risk based that they face in foreign countries. Political risks are defined as any changes in the political environment that may adversely affect the value of the company's business activities. Most political risk analysis can be divided into five categories:

1. Ownership Risk: Whether the property of the company is endangered through confiscation or ex-appropriation

2. Operating Risk: The ongoing operations of the company and or say it is “at risk” for change laws, environmental standards, tax codes, terrorism, armed insurrection, etc.

3. Transfer Risk: When government regulations interfere with the company's ability to transfer funds into and outside of the country.

4. Strategic Risk’s: Unacceptable business strategies that are not taken into consideration.

5. Reputation Risk: Gaining a perceived or actual poor business reputation that is generated by a negative outcome of a risk event.

Anticipating and managing the potential risks is essential. This approach, according to Mr. Daly, is beneficial to companies for a variety of reasons:

1. A reduction in operational loss-the state in which a company’s cost of running an operation exceeds its value.

2. Lowering auditing costs, undocumented expenses, and accounting errors can increase the cost of an audit.

3. Earlier detection of illegal activities inside and out of the company-computer hacking, contract breaches

4. Future risk reduction-greatly reduces future events that may negatively affect a company.

Risk Analysis as Part of Your Business Plan

As the author John R. Daly points out in this article, business plans consist of clues to hidden risks to the business. Reviewing the business plan on a monthly basis will reduce potential risks. An acknowledgement and response in trying to correct troubles early will prevent much larger problems from forming later.

Relative to Risk Analysis, key elements for a successful business plan must always be under internal review of its overall achievement in addressing the company’s defined business goals.

The four-business risk analysis methods are as follows:

A.   Process Mapping

Sometimes, we make the wrong decisions based on assumptions, thinking we understand the process or the operation competently without seeing the problems. Guesses should never play a role in the business plan analysis.  An accurate statement of the problem is perhaps the most crucial step in discovering the perfect solution. Process mapping is used to “visually” illustrate all key steps in a process or system.

B.   Process Improvement

With process mapping, we can determine what improvements can be made to increase productivity, performance, and quality. If improvements to the process are deemed required, these improvements must be clearly be defined. Methods carried out for development must have measurable goals to specify the desired results.

C.   Change Management

Change management is a method dealing with the requirement for change, both from evaluations prepared from within the company or organization and from outside views. Change management means the design and implementation of new techniques and actions to deal with changes in the business environment. As Mr. Daly states, the prerequisites that make up change management include the adaption to change, the administration of change, and the incorporation of change into the organization’s culture.

D.   Risk Assessment

Risk assessment is a method of determining the feasibility or likelihood of potential risks permitting the development of a contingency plan to reduce or eliminate these undesired effects. These plans are based on the assumption of unanticipated or unintentional failures in any part of a process.

Effective utilization, interpretation, and implementation of a process analysis plan will provide the exchange of information, the ability to make sound judgments, and to build up confidence and enthusiasm.

Contingency Plans

Contingency planning is a systematic method of determining the feasibility or threat of potential risks. Encouraging a company's development of contingency plans reduces or eliminates these undesired outcomes. Contingency plans are based on assumptions of unforeseen or unintended failures in any part of a process.

As the author Mr. Daly points out, an organization preemptively develops corrective action plans based on anticipated risk probability factors and the severity of these potential risks. The development and implementation of the corrective action plans includes training and implementation of standard operating procedures to minimize these risks. In addition, as part of the process, the procedure must closely monitor the risk-management plan relative to its value to achieve the desired prevention or resolution of any other possible risks. As a guideline, to the process of risk analysis, I have listed below potential risks that would need to be considered systemic priorities in an organizational risk plan assessment.

● Disruption in the supply chain

● Human or mechanical errors

● Weather conditions

● Political disruption

● Economic

● Quality Related

● Legal

● Environmental

● Change in priorities

● Change in resources

Risk Management and Loss Control

What is risk management? This method involves safeguarding the resources of your organization by detecting and analyzing your company's exposures and ten making decisions for how to manage risk exposures, financing losses, and carry out and monitor a risk analysis program.

Some types of risk are specific to your business organization, and other types of risk are common in many organizations. When doing the research on this article, Mr. Daly makes clear that some of the key concepts of risk analysis such as identifying risks, analyzing risks, controlling risks, paying for risks, and managing risks, will help one to prepare for risk analysis in their own business.

Loss control equals prevention. One way to avoid or limit losses is to instruct employees in security measures. It is less expensive to take the time to teach and evaluate employees than it is to pay for an injured worker or damaged machinery. Devote the time, to make sure all workers aware of their work-related responsibilities in reducing risks to the business.

Alarm systems along with security cameras are also a reduction monitoring strategy. Preventing intrusive break-ins and fraud are much less expensive than trying to recover any loses from intrusion and theft.

Sprinkler systems are an essential loss control system, particularly within an organization that works with combustible substances. Whatever a business owner can do to prevent injury, harm, or theft is a significant risk management.


Mr. Daly points out in his summary, that the risk analysis plan must always be under constant review for its overall effectiveness in addressing potential and unanticipated risks, and would need to include a response plan to respond quickly to changes of risk tactics when required. When changes occur, they can dramatically increase the dynamics for failure. With that possibility in mind, any changes to the plan will need to be carefully reviewed, any organizational concerns resolved, and a corrective action resolution immediately distributed to all that are directly involved. 

A company that cannot correctly communicate internally or externally relative to the implementation of organizational risk management procedures will eventually suffer the consequences of a lack of continuous improvement, growth, and development within the organization, and a company’s failure to maintain the costs of poor planning.

John R. Daly was born in the Bronx borough of New York City. When John was 12 years old, his family moved to Palo Alto, California where John spent his grade school years, college, and early adult life.
John spent his business career in senior management positions where he has focused primarily on International Sales, Marketing, and Business Administration.
Before starting his own freelance writing career in 2009, John served as the Director of Asian Manufacturing Operations (1992-2009) for a Fortune 500 manufacturer. In this position, he was responsible for establishing integrated contract manufacturers, international sales and marketing, supply-chain management, quality/business systems, and program/project management. His principal business office was located in Taipei City, Taiwan with branch offices located in Hong Kong, Singapore, Shanghai, and Lyon, France.
With over than three decades of business organizational and management experience, John has developed the right skill sets to put in place a determined and focused business organization. As an entrepreneurial individual, John is currently building his own successful consulting and freelance writing business.
John can be contacted through his website http:/