The importance of risk assessment in drawing up a business plan
Risk analysis is contained in the requirements of any bank, any organization that provides government benefits and preferences, any international business planning standard. Any investor and any commission of a grant to provide funds for the creation and development of a business will require an analysis of the risks in a business plan. The initiator of the project should not forget about the analysis of risks if he wants to develop a business plan suitable for implementation.
For each type of risk in the business plan should be analyzed
- Mitigation (exclusion) measures,
- Probability of occurrence,
- Degree of impact on project performance,
- Risk management capability.
Typically the following risks are analyzed in a business plan.
This section of the business plan analyzes the risks associated with the technology of doing business. These can be the risks of equipment breakdown, plant and animal diseases in agricultural projects, the negative impact of medical procedures on the health of patients, ill-considered monetization of Internet projects, and others.
Organizational and management risks
The main risks requiring analysis in this section of the business plan are the failure to fulfill the plans for the creation and development of the project, the plan for increasing the client base, the plan for the sale of goods or services.
The financial risks of the project are associated with violations of the investment schedule, the emergence of overdue accounts receivable from customers, the inability to timely pay off accounts payable.
Having carefully worked out all the details of the project of the future business and having drawn up the production, organizational, marketing and financial sections of the business plan, you should not rejoice ahead of time if you managed to get performance indicators indicating investment attractiveness. Not a single owner of capital will invest in a project, the development of which does not analyze the factors of the external and internal environment of the company, which can change due to a combination of circumstances and negatively affect its activities. Such factors and conditions for their occurrence are risks - potential threats to disrupt plans, which should be taken into account and leveled in the appropriate section.
How to conduct a risk analysis
The section aimed at identifying risks is usually the last to develop as part of the business plan and not always with sufficient detail. Risks in the standard plan of a project requiring investment are drawn up in a list, often without reference to the specific conditions of the firm's functioning. Such an attitude is unprofessional and detrimental, both for business planning and because of the demonstration of their own insolvency in front of the investor, who will conclude that they are unable to anticipate difficulties and avoid them.
Global Threats of the Project
Each new business plan, regardless of the content of the project, is subject to environmental threats that do not depend on the will and capabilities of the entrepreneur, including:
- declaration of war in the territory of the country or region of management;
- flood or earthquake in the territory of the firm's location;
- social tension, riots, coups, uprisings, revolutions, etc.;
- changes in legislation and / or taxation;
- devaluation of the national currency, etc.
It will be enough to include this list of risks in the plan at the stage of their identification, it is necessary to understand the possibility of their implementation and develop subsequently compensating measures.
Algorithm for identifying individual risks
In fact, it is not too difficult to perform an analysis of potential risks, for this you need to re-conduct a sequential assessment of all the indicators that were adopted and calculated when developing sections of the business plan. The algorithm of actions in this case should be as follows:
1. Each statement made about the benefits of a product or service is considered, and a situation is assumed where a competitor can oppose a product with comparable characteristics. In this case, the competitive advantage is leveled, which means that the assumptions made about the potential sales market must be adjusted downward.
2. When developing the production section of the plan, a wide range of parameters are considered, each of which can change under the influence of external or internal factors, in particular:
- the pledged cost of raw materials, parts and components can rise sharply due to inflation;
- there is always a risk of fire or flooding for rented or purchased commercial real estate;
- the proposed logistics scheme may be disrupted due to vehicle breakdowns and / or disruptions in the movement of rail, road and water transport, and the result will be equipment downtime in production;
- purchased used equipment, in order to save funds during promotion, may fail and cannot be repaired, which means there is a risk of disruption of the production program and the need
- additional investments in the acquisition of new machines and units;
- warehouse stocks, including including finished products, can be robbed or damaged due to getting wet or damaged by rodents.
3. The organizational section of the developed business plan provides for the choice of a form of taxation with a fixed rate, while the risk of its increase is not excluded, which means that the expenditure item of the budget will grow. The staffing table, proposed taking into account the need for personnel, may turn out to be insufficient for the needs of real production, due to turnover, diseases and other factors, which means there is a risk of increased costs to the project's payroll.
Business Risk Classification
General description of business risks is presented in the table.
Type of riskBrief descriptionUncontrolled risksEconomic, political and social situation Social upheavals, economic crisis, nationalization of assets. Natural disasters Earthquakes, hurricanes, tsunamis, etc. Currency risks Currency fluctuations, changes in the principles of currency regulation. Change in taxation Increase in tax burden. Changes in legislation Legislative initiatives that have a negative impact on the business environment. Controlled Risks 1. Manufacturing. Technological risks, the risk of defects, disruption of production chains. 2. Financial. Lack of working capital, accounts receivable, growth in the cost of the company's products. 3. Personnel. Inconsistency of the qualifications of employees with the work performed, dismissal of key employees, sabotage, labor legislation. 4. Market. Changes in the sectoral market, negative for the firm: new technologies, principles of trade, etc. 5. Operating. Violations in the performance of business processes and operations, in particular - accounting.
Uncontrolled risks cannot be managed by the company itself, while the company can influence controlled risks. The business plan should provide for the prevention of all types of business risks.
The business plan should provide for the prevention of all types of business risks
When writing this section, it is necessary to highlight the following points:
- 1) provide a list of possible risks, indicating the likelihood of their occurrence and the expected damage from this;
- 2) indicate measures to prevent and neutralize threats that create risks;
- 3) present a risk insurance program;
- 4) substantiate the decision about in which companies, under what conditions (according to what system) and for what amount the risks are insured;
- 5) prepare copies of insurance policies.
In this section, prospective investors or creditors of the organization should present for consideration the possible risks that may accompany the implementation of the project, as well as present the main methods of protecting them to prevent or reduce the degree of impact on the financial position of the organization.
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When developing a business plan, special attention should be paid to assessing the risks associated with the implementation of the project. This will be an additional plus when communicating with creditors
He who does not take risks does not earn
It's not a secret for anyone: to open your own business, you need to go through a lot. By "many" is meant not only the realization of one's own desire, planning and investing money. First of all, an entrepreneur, whether he is a beginner or an inveterate businessman, must be aware of the risks that await him on the way to profit. It is clear that when you start your own business, doubts cannot be avoided. But some cope with these doubts, while others only get stuck in them more. What are the business risks and how to avoid them?
Risk of setting up a business
The main risk for every entrepreneur is doubt that the business will not bring profit. And the outcome of a doubt depends on how a person is psychologically tuned in to the success of his business. Excessive pessimism has not saved anyone yet, but you can't go far with extreme optimism. It must be remembered that any business, no matter how simple it may seem to be implemented, cannot be viewed through rose-colored glasses.
When starting a business, an entrepreneur must keep in mind the main parameters:
- a clear idea and a plan for its implementation;
- the level of competition and their capabilities in order to be able to cope with competitors.
In addition to these points, the reaction of society and the market to the appearance of a newcomer is always added. Of course, each business and approach to it is individual. But an entrepreneur, in any case, must have an objective idea of reality in order to be able to correctly reflect the blow at any time.
Standard Business Risk
By itself, entrepreneurial risk implies the risk arising from any type of entrepreneurial activity associated with the production and sale of products, goods and services, commodity-money and financial transactions, commerce, as well as the implementation of scientific technical projects. It is believed that it is even necessary - due to the fact that everything is learned by trial and error. There are many examples of entrepreneurial risk: an entrepreneur bought a product, but it is not being sold; completed any construction work, and the building burned down; offers any services, but they are unclaimed.
No business can do without financial risk. Moreover, he pursues every businessman throughout the development and formation of the business. Financial support of a business is important at every stage, from initial investments (which include loans and investments) to the constant organization of sales, assessment of the financial condition.
Financial risks give rise to initial doubts about the future of a particular company. A businessman is constantly in a vicious circle, where it is impossible to predict what awaits you around the corner, from fluctuations in the exchange rate and tax increases to the desires of buyers and the behavior of competitors.
The section in which the risks of the proposed project are assessed is not a mandatory part of every business plan. A business plan that is drawn up for small businesses or small-scale commercial and industrial operations most often does without this section.
The point is not that the implementation of such a project is affected by a small number of risk factors. A small project depends on the same conditions and circumstances as a large one, but among them it is easy to isolate defining ones that are easy to analyze.
This analysis does not require large-scale research and in-depth development, so it is usually performed directly by the owner of the enterprise or the technical director.
Since in this case we are talking about a relatively insignificant investment, prospective investors and lenders do not insist on providing this data as part of the business plan. They carry out, if desired, a risk analysis on their own, or they receive the necessary information in the course of additional consultations with the project executors.
But everything changes when a business plan is drawn up for a fairly large-scale project. In this case, risk assessment and analysis are necessary. Their results should be systematized and presented in a separate section of the document.
When it is supposed to involve large investments, the problem of risk analysis comes to the fore. The complication of the project automatically entails an increase in the importance of the factors influencing it and the risks associated with them.
There is a kind of transition from quantity to quality, that is, some kind of risk that could be neglected for a small project, due to its insignificance, with an increase in the complexity and volume of the proposed operations takes on serious weight.
Neglecting such risks can have a detrimental effect on the implementation of the project and even lead to its complete collapse.
Classification of risks in business planning
Investment risk is the probability of loss or non-receipt of profit from invested funds. Investment risks are measurable, but, as a rule, not fully, due to the impossibility to fully take into account the nature and quantitative indicators of the impact of all external and internal factors.