Are you conducting feasibility study on a business project and need help doing the analysis? If YES, here is a complete guide on how to do risk and sensitivity analysis.
The rate at which businesses fail can be traced to lack of business training. Most people jump into a new business once they notice that the business is trending and highly profitable. They fail to carry out their due diligence to know if the business is worth investing in. Part of what you need to do aside undergoing business training before starting your business is to conduct risks and sensitivity analysis for your business.
What is Risk and Sensitivity Analysis?
Conducting risks and sensitivity analysis involves accessing all the risks and sensitive areas that is associated with the type of business you want to start. As a matter of fact, there is no business that is not prone to risks and it is your responsibility as an entrepreneur to access the risks involved in running the type of business you are about to start and also to know whether you have what it takes to shoulder the risks.
Likewise, sensitivity analysis will help you put measure in place that will help you predict the outcome of all the business decisions you make. Simply put, sensitivity analysis will help you increase your understanding of the existing relationship between input and output variables in your business. It is a known fact that succeeding or failing in business is all about the decisions you make.
Although conducting risks and sensitivity analysis will not help you to totally eliminate all the uncertainties of making business decision, but you are sure that it will help you minimize the uncertainty to the barest minimum. Now here the steps you would need to follow to be able to effectively conduct risks and sensitive analysis for your business;
How to Do Risk & Sensitivity Analysis in a Feasibility Study
1. Study and Research
To start with, if you have never conducted a risk and sensitivity analysis for a business before, then you have a lot of work to do. What is expected of you is to spend enough time studying and researching on the subject – risk and sensitivity analysis.
There are materials online and in libraries that will help you achieve your aim of conducting a risk and sensitivity analysis for your business. The truth is that conducting risks and sensitivity analysis is usually done by experts because of the technicality involved, but you can do it yourself if you spend time to study existing models.
2. Collect and Analyze Data and Graphs
Part of what you need to do when studying and researching on risks and sensitivity analysis is to collect and analyze data and graphs that are related to your business. Once you are able to properly analyze data and interpret graphs, it will give you an edge when conducting your risks and sensitivity analysis.
You will be able to pin point areas where you would need to concentrate on. As a matter of fact, you can not effectively conduct risks and sensitivity analysis without the skills to properly analyze graphs and interpret data.
3. Develop a Theoretical Framework for Using Risks and Sensitivity Analysis for Decision Making
Once you are able to analyze the required data and graphs, what is expected of you to do is to develop a theoretical framework for using risks and sensitivity analysis for decision making. The essence of conducting risks and sensitivity analysis for your business is to put structures in place that will help you mitigate risks and uncertainty in your business and in turn maximize profits. You can work with experts to help you create a model that is suitable for your business.
4. Run the Model a Number of Times before Adopting It
It is one thing to develop a theoretical framework that will guide you in decision making in your business, it is entirely another thing for the model to work in real life situation. It is important to run the model you developed for risks and sensitivity analysis for your business a number of times before adopting it in your business.
What is the use of having a fantastic theoretical framework on paper without it working in real life situation? The best time to adjust your theoretical framework is during the process of test running it; once you discover any drawback, then you should go back to the drawing board and restructure or adjust your framework.
5. Review the Document Generated From Your Risks and Sensitivity Analysis
Once you are done with all the steps listed above, you would have succeeded in completing your risks and sensitivity analysis for your business and also you will be able to produce a comprehensive document in that regard. The process will not be complete if you do not review the document generated from your risks and sensitivity analysis. You can engage the services of a professional to help you review the document.
Over and above, if you are successful in conducting your own risks and sensitivity analysis for your business, you would have succeeded in finding the possible outcomes of most of the business decisions that you will make in your business and you will be well guided.
As a matter of fact, some folks consider risks and sensitivity analysis as a systematic common sense technique adopted by many business owners to minimize making wrong decisions that will cost the company.
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