What Is Risk Evaluation?

K. Reynolds
K. Reynolds
Woman with hand on her hip
Woman with hand on her hip

Risk evaluation is the process of determining the probability and effects of potential business risks in the marketplace. Companies must continually evaluate the risks that could have a detrimental effect on the business and work diligently to implement strategies that could help to circumvent or mitigate any negative outcomes caused by the inherent risks. Typical business risks that are prone to evaluation could be assessing the potential impact of a technical malfunction, such as a computer network failure, or determining the financial impact that would be caused by rising interest rates on borrowed capital.

Risk can be categorized in a multitude of ways and companies must develop risk evaluation frameworks in order to effectively determine the which have the highest priority. Financial risks may pose more of a threat to a real estate company than a technology firm that is debt-free. In contrast, technological system failures may pose a much greater risk to the same technology firm, while having little effect on the business operations of the real estate company.

The skill of risk evaluation is actually a sub-category of the field of risk management. This field encompasses identifying, evaluating, and prioritizing business risk. Risk evaluation is thus simply one critical section of a larger risk management system. There are several standards for risk evaluation and other risk management techniques that vary depending upon the context of the risk. Those associated with project management will differ from those associated with financial portfolios; therefore, a diversity of risk evaluation standards have been developed for a variety of situations.

Upon completing a risk evaluation, companies can choose to mitigate the risk in a variety of ways. Several mitigation techniques include creating new business procedures that will account for the impending risks associated with the procedure, or avoiding them completely. In certain cases, a business may be able to transfer risk to a third-party company, such as an insurance company. Ultimately, all of the risk management techniques tend to categorize solutions within one or a combination of four different categories, including avoidance, reduction, sharing, and retention.

It should be clear that there are numerous standards and methodologies relating to risk evaluation. Proactive companies consistently use the latest techniques to discover new risks that could jeopardize the efficiency of their business model. Upon discovery, these companies quickly attempt to mitigate or avoid risks that could be detrimental to their business goals.

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