One out of four businesses fail after their first year. The number of failed businesses grows to 50% by the end of their fourth year in operation. About 5% of these businesses fail because of inadequate cash flow or sales. Many business owners know this is the way the corporate world works but don’t take the proper steps to prepare themselves and their organization for it.
While risk is a natural side effect of business ownership, lessening the amount of risk involved is an imperative strategy of successful business owners. With financial risk analysis, you are better able to forecast the amount of uncertainty facing your business, allowing you to be better suited to avoid it.
Financial risk analysis is a strategy used for forecasting the uncertainty of cash flow, variables surrounding portfolio/stock returns, and statistical analysis to determine the probability of success and future economic turbulence. It is the first step in creating a strategy to keep your business profitable.
Part of risk analysis and management is the creation of a Risk Management Plan (RMP). An RMP is prepared by a project manager (or the industry equivalent) and attempts to estimate potential issues and the resulting impacts they will have on the business and economy as a whole. By mapping out potential issues, businesses are better equipped to handle such issues if they come to fruition. While they will not be able to avoid them completely, professionals are able to identify and mitigate risks.
Risk analysis is often completed using mathematical and financial data analysis software that will calculate total current assets, compute profit margin ratios and industry average financial ratios. Professional analysts will often collect as much data and logistics about the business as possible before beginning the analysis.
By attempting to predict future obstacles and preparing for the magnitude of the resulting consequences, businesses are better prepared to survive otherwise unforeseen and potentially disastrous events.