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Risk assessment is a process that evaluates the negative impact of associated risk. There is risk involved in every form of business, whether it is health related or financial business. Therefore, managers must implement certain best practices to assist them in controlling negative consequences of risks.

Definition of Risk Assessment

It is defined as an important process in business management, aimed at protecting the business and people related to it. Risk assessment is an important aspect of risk management.

Business managers and investors use risk assessment to measure the profit that will result from a particular investment. This helps in controlling financial losses to the business. In order to succeed with this, managers have to ensure compliance best practices with laws governing the business.

Importance of Risk Assessment

Risk assessment helps with implementing controls to ensure risk management. Once managers assess risk, they can foresee the negative impact of risk on assets and people related to the business. This allows them to implement necessary strategies (best practices) to mitigate and control risk.

Examples of Risk Assessment

When a lender receives a request from a creditor, there are certain protocols (best practices) that must be followed. The lender must make sure that the money lent returns on time. This means that the credit history of the person in question has to be assessed. This will tell the lender whether the applicant will return the money or not. Based on the assessment, the lender will then decide on how much interest to charge to ensure risk management. If the lender doesn’t think the creditor will pay off on time, he/she might as well decide not to give the loan at all.

Another example is risk assessment in a health care facility. Medical practitioners have to assess the risk associated with diseases. There are some diseases that are contagious and transmittable via aerosols. This means that people around the sufferer are at risk. To control this risk doctors must have a setup where people are safe and the spread of disease is controlled. This means medical practitioners have implement measures (best practices) to protect their employees and customers. This is compliance with risk management.

In simple terms, risk assessment means evaluating the extent of damage or threat imposed by failure to impose controls. Hazards must be identified to be able to decide on what measures will be appropriate.

How to Assess Risk?

Regardless of what form of business institution it is, there are five standard strategies that managers must use. These are:

1. Identify hazards/risks
2. Conclude where the impact of the hazard will be (e.g. employees, customers, assets)
3. Evaluate the impact of the risk and precautions or backups needed
4. Document the conclusion and implement control measures
5. Review the assessment based on the outcome and document updates if necessary

There are best practices to think about when risk assessment is being conducted. First of all, define the threat or hazard. This can be ANYTHING that harms the business, employees and customers. Secondly, understand that risk can never be eliminated, but mitigated and controlled.

Further reading: Corporate Governance | Audit | Performance Improvement