RISK ASSESSMENT- BUSINESS PLAN

Risk Assessment

Risk Assessment  is always associated with any business. Risk vs. Return assessment is what an entrepreneur should evaluate. The higher the risks the higher are the returns.

At the startup stage every entrepreneur will not focus on assessing the risks , let alone build plans to reduce the impact of the risks.

 However, at some stage a business needs funds from external sources and entrepreneur need to answer the investors’ questions. They cannot shy away from this activity.

Sooner or later, disaster will strike. A disciplined approach to identifying and mitigating risks can help you beat the odds. Will you be ready?”-  Akira Hirai

Image Courtesy: Stockphoto

Risk Assessment- Category

Risks falls under two categories - controllable and uncontrollable. Some unforeseen and unpredictable changes in the environment are beyond the control of the entrepreneurs. A few examples-

  1.  Oil shock in 1993 when fuel prices shot up three times
  2. Subprime crisis in 2008
  3. Natural Calamities
  4. Impact of Y2K on IT systems:

The whole world anticipated and prepared for the above transition. Billions of dollars were spent. Eventually, it was an anticlimax and there was not a single problem was witnessed. It made people wonder about  the hype.

The risk assessment can be Industry Specific risk & Company specific risk.

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Types of Risks

A professional business plan should include a discussion of business risks and challenges. 

   Market Risks

Market may not grow as expected for a new product or service resulting in cash crisis for a startup business.

The entrepreneur may be supplying the product or service to a single large customer (B-B). The business of their customer is subject to economic environment and an unfavorable climate will slow down,affecting the business.

E- Commerce businesses affected brick and mortar setup. Solution could be to join the bandwagon.

 (Flipkart, an e-commerce business offering mobile phones exclusively on their platform affected brick and mortar businesses) 

   Competition Risks

Low entry barriers will attract competitors in a growing market. The existing players have to retain customers through superior service or have customer loyalty program.

Fast food restaurants in the  USA  are facing competition from new entrant like Subway whose USP is “Freshness and healthy food”

In  automobiles all multinationals are present in India. In spite of this, (Maruti ) Suzuki has retained its market share of 50%. This was possible by having an affordable entry-level car and a superior customer service.

Jagdish Kattar a former M.D   of Maruti Suzuki had  said that service got them more customers than sales effort. 

  Technology Risks

Internet has revolutionized the entire business processes.  A customer can compare prices, quality, service etc   of all the players sitting at home .

3 D printing is already changing the manufacturing paradigm .Costs will be lower even if  a single piece is  manufactured, defying mass manufacturing logic.

    Regulatory Risks

The government can bring in new laws and cost of compliance may affect financial viability of the business.

   Financial Risks

Cost of finance may go up or margins may drop due to excess supply or low cost alternatives.

    Management Risks

The critical human resources leaving the organization may affect business. ‘How to have golden lock’ on these resources could be a strategy.

Malpractices, theft and non-compliance of statutory requirements are a serious threat.

 Human greed has resulted in downfall  of many businesses.

The entire 2008 subprime crisis is a result of top management greed or decisions based on short term gains.

 Mitigating  Risks - Process

  1.  Prepare best-case and worst-case scenarios with key parameters of the business to help assess the quantum of risk.
  2.   What are the measures proposed to counter these risks?
  3.   Sensitivity analysis of key factors to simulate the impact of changes

Nuggets- Risk Assessment

1)    Formulate strategy to mitigate risks

2)    A must to acquire funds

3)    Improve success rate of businesses