Risk analysis is the method of assessing the probability of an unwanted event that could occur in a business. Risk analysis consists of the study of the unknown side of a business plan and refers to the uncertainty of cash flow forecasts, variations in stock returns, the probability of success or failure of a project and possible economic contexts.
Risk analysts complement the work of forecasting professionals to estimate the possible impacts of a misestimation of the business environment. All businesses are exposed to some risk; risk and profitability have certain conjunction. The problem is that too much risk can lead to failure. Risk analysis helps to find a balance between risk-taking and risk reduction.
Risk assessment allows companies and investors to evaluate the likelihood that an adverse event could harm a company, project or investment. Risk assessment is critical to determining the value of a specific project or investment and the best process(es) for assessing and reducing those risks. Risk analysis offers different approaches that can be used to assess the risk/reward of investment.
A risk analyst starts by identifying what could go wrong. These negatives must be weighed against a probability metric that measures the likelihood of the event occurring.
Finally, the risk analysis attempts to estimate the magnitude of the impact that will be made if the event occurs. It is important to know that risk analysis enables professionals to identify and mitigate risks, but not to avoid them completely.
Risk analysis can be quantitative or qualitative.
In quantitative risk analysis, a model is built with simulations and statistics to numerically quantify the risk. Inputs, which are mainly assumptions and random variables, are fed into a risk model. Depending on the type of risk being analysed the model will generate results which are often displayed using graphs. The aim is to create simulations that generate several ranges of possible outcomes related to a decision or action in the company's market. The results of the simulations are aggregated to obtain a probability of the analysed event.
Qualitative risk analysis is an analytical method that does not use numerical or quantitative data. Qualitative analysis requires a written definition of risk areas, an assessment of the possible impact and action plans in the event of a negative event.