What is Risk Analysis?
What is Risk Analysis?
Risk analysis, being a component of risk management process, deals with the various kinds of events and causes and effects of these events which may resultantly cause harm to the functioning of the firm. Risk analysis supports the business managers to work out the proper decisions in business working. Risk analysis is done on the basis of the possibility of an event taking place. Thus, the risk of an event can be measured through the possibility (probability) of the event taking place with regards to the frequency and severity.
An event can have wide variety of characteristics or possibility with respect to varying degrees of seriousness, depending upon its nature and the extent of damage it can create, and the perception of the event’s occurrence taken by the management. Each project or activity can have many associated risks, and these risks can vary depending upon technology, funding, organisations involved etc.
However, in broad terms, the key sources of project or process risks are like:
- Commercial risk
- Financial risk
- Legal risks
- Political risks
- Social risks
- Environmental risks
- Communications risks
- Geographical risks
- Geotechnical risks
- Construction risks
- Technological risks
- Operational risks
- Demand or product risks, and
- Management risks etc.
These sources of risk directly influence the project-specific and non-project-specific performance. The analyst is supposed to define the boundaries of each risk driver and its detailed risk elements. Then, he/she has to move to estimate the impact of the same.
The decision with respect to division of risks into specific element; and later on evaluates. The parameters of evaluations are generally affected by personal subjectivity and belief of the financial analyst. The risk analysis explores the avenues for business managers to take informed decision.
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