Risk analysis is the process of quantifying and qualifying the dangers to a business or investment posed by anticipated or unanticipated events in the wider economic, social, political and natural environment.

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Navigator Consulting's risk analysis framework includes the following elements:

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• The risk category, e.g. competitive risk (which might translate into sensitivities such as sales price or volume reduction, raw material price increase); macroeconomic or financial risk (typically the impacts of inflation, currency decline or credit availablility); political or regulatory risk (changing taxation terms or expropriation), and others.

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• The risk probability, i.e. the chance and extent the risk has of materlalising.

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• Likely triggers and indicators that the risk event is occurring.

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• Risk sensitivities, i.e. the specific impacts risk materialisation will have on the business plan and financial forecast.

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• Risk mitigation, or what measures should be undertaken from the viewpoint of project design and investment management to minimise or avoid the risk in question.

 

A proper risk assessment is integral to investment due diligence, business planning and financial forecasting. The utility of this cannot be under-estimated. In one large investment project which occurred in July 2008, for instance, we insisted on factoring a risk of property price devaluation in a target region by 30%. This scenario materialized within two months, following the Lehman brothers collapse and the acceleration of the global financial crisis.

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Risk assessment can effectively be combined with scenario planning to more fully describe and understand the magnitude of the risk.