What Is Risk Analysis? (#12)
It is a universally acknowledged truth that entrepreneurship is almost synonymous with risk. This is why risk-taking is such an extremely important trait to have as an entrepreneur. However, just because the entrepreneurial journey is filled with risks does not mean that decisions should be taken without proper analysis. This is where risk analysis comes in.
Risk analysis is a strategy that can allow you to measure the potential outcomes of a risk, and thus, help you make sound decisions that are smart for your startup. As a process, risk analysis is crucial for startups because it can allow you to quantify that gut feeling that you, as an entrepreneur, likely have about a certain risk. Having done risk analysis can also be incredibly helpful in boosting your confidence when you’re pitching your ideas to potential investors.
There are two approaches to risk analysis: a qualitative approach and a quantitative one. Both approaches are important to know and choosing between them depends on the type of risk and situation.
The qualitative approach to risk analysis is based on the assessment of the characteristics of risk. It involves categorizing risks based on the severity of their potential outcomes and also involves a written evaluation of the risk, its potential outcomes, and possible countermeasures for those outcomes. Therefore, the qualitative approach is in a way more subjective than the quantitative approach. SWOT analysis is an example of a qualitative approach to risk analysis that you may be familiar with.
Quantitative risk analysis, as indicated by its name, involves more numerical analysis of risk. With this approach, a start-up calculates the effect of a risk on the business and its objectives, in addition to the probability that a risk will succeed. An example of a quantitative risk analysis technique that you may or may not have heard of is decision tree analysis.
Whether you choose to try the qualitative approach of risk analysis or the quantitative one, as a process it is going to be extremely useful to you, especially considering the number of risks that startups are are vulnerable to.