What is a Risk Assessment?
A risk assessment is a systematic process of identifying, analysing, and evaluating potential hazards or uncertainties that could impact a business. Its goal is to estimate the likelihood and severity of risks so organisations can implement appropriate controls to mitigate or manage them.
Risk management identifies, assesses, and manages business risk (threats and opportunities). These risks stem from various sources, including financial uncertainties, legal liabilities, technology issues, strategic management errors, accidents, and natural disasters.
A successful risk management program helps a business consider the full range of risks. Risk management also examines how risks relate to a company’s strategic goals and their cascading impact.
What Is the Difference Between Risk Analysis and Risk Evaluation?
| Stage | Focus | Key Objective | Primary Output |
| Risk Identification | Spotting hazards & uncertainties | List exposure to potential threats & opportunities | Risk Register |
| Risk Analysis | Estimating likelihood & impact | Determine threat severity (Qualitative or Quantitative) | Risk Scores & Ratings |
| Risk Evaluation | Decision-making & prioritisation | Compare risks against business tolerance | Prioritised Risk Treatment Plan |
A risk assessment identifies risks that could affect a business’s ability to conduct business. This risk assessment process helps identify the inherent business risks and provides processes and risk control measures to reduce the impact of risk on business operations.
What Is Risk Analysis?
Risk analysis identifies and analyses potential issues that could negatively impact key business initiatives or projects. This process helps businesses avoid, accept, reduce or transfer risk.
How Do You Identify Risks?
Risk identification determines risks that could prevent the business from achieving its objectives and outlines its exposure to uncertainty. This requires knowledge of:
- the organisation
- the market in which the company operates and
- the legal, social, political and environmental situation in which the business exists
Risk identification requires a solid understanding of the company’s strategic and operational goals, the factors contributing to its success, and potential threats or opportunities.
When approaching risk identification, use a systematic approach to ensure you identify all significant activities and risks within the company. All risks should then be categorised. There are many ways that businesses and business activities can be risk classified. Here are a few examples:
- Cost: This risk is when the cost forecasts exceed the budget. Cost risk may lead to performance risk if cost overruns lead to reductions in scope or quality in an attempt to stay within budget
- Schedule: Schedule risk is the likelihood of failing to meet schedule plans and the effect of that failure on the business
- Financial: These are concerned with the management of an organisation’s finances and how external factors affect it, such as standard financial practices like cash flow, managing credit, addressing exchange rates, interest rates and other market exposures
- Health and Safety: A health and safety risk relates to workplace risks and the employer’s assessment of potential hazards that can lead to harm, injury, death, or illness for staff, third-party workers, other stakeholders, or the general public. It can also assess working practices or work regulations where non-compliance exposes a risk. For example, in an occupational health context, no method statement is available for a manual handling work activity
- Environmental: Environmental risks to health include pollution, radiation, noise, land use patterns, work environment, and climate change. These risks, if threats, can have a significant negative impact on a business’s reputation
- Security: A risk that could damage the business by giving information to a competitor, or an unattended package left could be deemed a security risk or a cyber attack
- Strategic: These concern the organisation’s long-term strategic objectives. They can be affected by capital availability, sovereign and political risks, legal and regulatory changes, reputation and changes in the physical environment
- Operational: These concern the day-to-day issues that the organisation is confronted with as it strives to deliver its strategic objectives
Under certain conditions, third-party risk identification by specialists providing professional services can be effective. However, in-house ownership of the risk management process and tools is needed to identify risks effectively.
How Do You Properly Describe and Document a Risk?
The critical requirement for a risk description is that it identifies the significant risk event, the consequences on program objectives, and the cause (if known). Disciplined use of structured formats can help in describing a risk, produce more effective risk statements, and avoid weak statements that lead to confusion.
The objective of the risk description is to display the identified risks in a structured format, such as a risk register.
A well-designed structure is necessary to ensure a comprehensive risk identification, description, and assessment procedure.
An excellent risk management process should be structured to support comprehensive risk identification, risk description, and assessment to estimate probability and consequences. Once this is done, it should be possible to identify the key risks and analyse them in more detail. The risk description can facilitate the description and assessment of risks.
Risks associated with business activities and decision-making may be categorised as strategic, tactical, or operational. Risk management must also be incorporated into project or change management at the conceptual stage and throughout the life of a specific project or change.
How Are Risk Likelihood and Impact Estimated?
Risk estimation, or characterisation, is the final step in risk assessment. Its goal is to produce measures of the risks being assessed. This involves defining the possibility of adverse consequences and the consequence (impact) of the risk. Ideally, the output of a risk assessment includes explicit definitions of both the magnitudes of possible implications and the likelihood involved.
When estimating the risk rating, you can use qualitative or quantitative approaches.
For example, consequence threats (downside risks) and opportunities (upside risks) may be high, medium or low. Likelihood (probability) may also be high, medium, or low, but it requires different definitions for threats and opportunities.
For example, many organisations find that assessing high, medium, or low risk is adequate for their needs and can be presented as a 3×3 risk matrix. Other companies find that assessing consequences and probability using a 5×5 risk matrix better evaluates risk.
What Is Risk Evaluation and How Is It Conducted?
Risk evaluation determines risk management priorities by establishing qualitative and/or quantitative relationships between benefits and associated risks.
Anyone responsible for a company’s operations must perform a risk evaluation.
A risk evaluation can help determine if a business is at risk from a cyberattack, natural disaster, or other threat.
It can also identify opportunities, such as improving productivity, increasing revenue, or creating a safer working environment.
A risk evaluation benefits the company by informing it where and how its business and reputation are at risk.
What Are the Key Takeaways for Managing Business Risk?
Risk assessment is a systematic process used to identify and analyse potential risk events that could positively or negatively impact a business’s ability to conduct business. The assessment should be provided as a written risk assessment, perhaps as a risk assessment form, or as provided in GetRiskManager within a software system.
Risk analysis starts by identifying potential risks that could impact critical business goals. This process helps businesses avoid, accept, reduce, or transfer those risks. A risk description clearly describes a risk event, its consequences for program objectives, and its cause. Risk estimation, also known as risk characterisation, is the final step in risk analysis. Its goal is to measure the assessed risks.
Risk evaluation determines risk management priorities by establishing qualitative and/or quantitative relationships between benefits and associated remaining risks.
Frequently Asked Questions
What is the primary purpose of a risk assessment in business?
A risk assessment identifies potential hazards and operational uncertainties that could negatively impact an organisation. Its primary purpose is to help business leaders estimate the likelihood and impact of these risks so they can put controls in place to avoid, reduce, or manage them effectively.
What are the key steps involved in a risk assessment process?
The risk assessment process generally consists of three main stages: risk identification (discovering potential threats and opportunities), risk analysis (evaluating their probability and severity through qualitative or quantitative methods), and risk evaluation (prioritising risks to determine appropriate management strategies).
What is the difference between risk analysis and risk evaluation?
Risk analysis focuses on understanding the nature, likelihood, and financial or operational impact of a risk. Risk evaluation takes those findings and compares them against the organisation’s risk tolerance levels to decide which risks require active treatment, mitigation, or acceptance.
Why is it important to use a structured format for risk descriptions?
Using a structured format, such as a formal risk register, ensures that every risk event clearly articulates its cause, the specific event itself, and its ultimate consequence on business objectives. This prevents vague risk statements that cause confusion and ineffective mitigation.
