Let’s think about your business risk by broadly dividing it into a couple of categories: Internal Risk and External Risk.

Internal Risks refer to risks that things will change within your company. And as you may guess, I am talking about bad changes. Some of those changes may be the death or disability of key employees, equipment that may become unavailable because of damage or theft, fraud and abuse perpetrated by employees or partners. The list could go on and on.

External Risks refer to changes in the market, the economy, the competitive environment, the regulatory environment and perhaps the political environment. The list for external risks and threats is longer than that of the internal risks.

How do you quantify risks when there are so many to identify?

First, don’t spend too much time on it. We have already established the fact that there are so many different types of risk out there that trying to identify all applicable risks will make you crazy.

So the starting point on quantifying risk is to ask the questions: How does my business work? How does this business make money? (See my article on Risk Identification)

For example if you are a retailer, your business model may be to sell at a retail location. You could identify risks as obsolescence of inventory, supply chain and logistic challenges, property issues such as rent escalation, employee challenges, etc.

If you are a manufacturer, you could add product liability, loss of competitive advantage, impairment of major customers, and regulatory changes among other things.

This exercise is to identify the major risks reasonably foreseen that could significantly impact your business. You are not trying to identify every little thing that could go wrong. You are merely trying to identify those risks that could bring your business to its knees. Then determine what the impact of each risk may be and the likely impact it may have.

When this analysis has been done, you are in a much better position to understand how you will react to the risk. (See my article on Risk Strategies). You can intelligently and logically determine if you need to avoid, mitigate, share or merely accept the risk.


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