The risk assessment in the business plan is the main thing that should be contained in the project. When creating a business plan, many either forget about it, paying minimum attention to the risks, briefly describing them, or do not include them at all in the content of the document. This approach is incorrect, since risk analysis is of primary interest and makes it possible to assess the correctness of the chosen path of business development.
What should you pay attention to?
A risk analysis in a business plan should contain not only possible risks, but also special methods and calculations that will help reduce or prevent their occurrence, and minimize the consequences.
Risks should be described in more detail if large sums are planned to be invested in the project. If the project is not too large, then you should not pay special attention to the analysis.
Before including risks in a business plan, you need to do the following:
- Compile a comprehensive list of risks related to the functioning of the business. It is necessary to take into account every detail, every little thing that can affect the development of the business. For example, if you plan to go into agriculture, you need to pay attention to statistics, find out with what frequency droughts occur in the region or, conversely, heavy rains with hail, what demand is the product of cultivation among local residents.
- Determine the possible risks in percentage terms. In this case, it is necessary to use the estimates and forecasts of specialists. Which area the expert will be from depends on the focus of the business plan. It can be a technologist, agronomist, builder and others.
- Assess the possible losses that may be incurred as a result of the risks that have arisen. Estimated in monetary and physical terms.
- Risks are best described in the sequence in which they may occur. Indicate potential damage for each risk. It is better to arrange the data in a table.
- Risks that are least likely to occur are best eliminated from the list immediately.
Risk categories
All risks of a business plan should be divided into categories for a more accurate understanding of the essence of the issue.
Commercial
Risks of such a plan arise already in the course of the activity of any enterprise and depend on various external factors:
Financial
This category includes risks associated with a possible delay in payment for delivered goods by counterparties, the wrong choice of investors, other sources of financing, for example, loans or pledges.
Risks within the enterprise
The main role here is played by the employees of the enterprise. Such a risk assessment in the business plan plays an important role, since any misunderstandings in the work between employees can lead to not the best consequences:
- Strikes, sabotage, as a result of which production may stop. They can arise due to delayed wages, incorrect enterprise policy.
- Trade secrets are violated, all important information goes to competitors.
- Not the most qualified workers were selected, and therefore inspections, fines, and litigation may arise.
Loss estimation
According to the degree of possible losses, the risk assessment of a business plan can be divided into the following categories:
- Allowable losses. In this case, the company may lose a smaller part of the possible profit.
- Critical losses. The amount of losses is estimated, which significantly exceeds the amount of profit.
- Catastrophic losses. The company cannot pay the amount of losses, as a result of which bankruptcies may occur.
Any kind of risk, regardless of its degree, can be prevented, thereby reducing the possible damage.
Minimizing losses
In a business plan, not only risk assessment is important, but the application of methods to minimize it, one of which can be insurance.
Thanks to insurance, you can reduce the majority of property losses, as well as various credit, commercial, production risks. It is necessary to understand that if the probability of the occurrence of risks is too high, the insurance company may refuse to insure this type of risk or overcharge the rates for its services.
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When organizing any business, as well as producing a new type of product, there are risks. Basically, they are associated with: the response of competitors, the possible emergence of new technical advances in this area, with insufficient qualifications of personnel (managers, developers, production workers, marketers), insolvency of consumers, a difficult political situation, etc. If even the listed factors do not create risk, it needs to be proven. For each of the existing types of risks, it is necessary to present a plan to reduce its impact. For calculations, you can use the tutorial.
Risk - this is the likelihood of losses (loss of income).
Risk degree: acceptable, critical, catastrophic.
Acceptable risk - complete loss of profit from the project or the production of any product.
Critical risk - loss of not only profits, but also reimbursement of expenses at their own expense.
Catastrophic risk - the risk of loss of own property of the enterprise or entrepreneur.
Risk management. Risk identification Risk analysis Risk assessment Development of risk reduction measures.
Types of risks depending on the stages of the project life cycle.
Pre-investment stage. Types of risks:
Erroneousness in the development of the project concept;
Incorrect definition of the location of the project;
Deciding on the feasibility of investments.
Investment stage. Types of risks :
Loss of a source of funding in the process of project implementation;
Failure to comply with the schedule of planned expenses;
Exceeding the construction time, equipment cost;
Failure to fulfill contractual obligations by contractors;
Late training of personnel.
Operational stage. Types of risks :
The emergence of an alternative product;
Expansion by foreign exporters;
Insolvency of consumers;
False choice of the target market segment, product sales strategy, sales network organization;
Changes in prices for raw materials and supplies;
Growth in interest rates;
Changes in tax policy;
Threat to environmental safety.
The main methods of project risk analysis:
1. Method of sensitivity.
2. Scripting method method.
3. Monte Carlo method and others.
Adapting theory to practical application, it should be noted that risk assessment is one of the most difficult and least likely sections of a business plan. When compiling it, specialist specialists inevitably use forecast estimates regarding sales volumes, future market share, development of a region, industry and even a single country. Therefore, all grounds for such projections should be specified in the business plan. At the same time, the main thing is not the volume of calculations and their accuracy, but the ability of the authors of business plans to predict in advance all types of risks that may be encountered and their origins.
The most common industrial risks are:
1. Production risk associated with the possibility of default by the enterprise of its obligations under the contract or agreement with the customer.
2. Financial (credit) risk associated with the possibility of default by the enterprise of its financial obligations to the investor (creditor).
3. Investment risk, associated with a possible devaluation of the investment and financial portfolio, consisting of both own and purchased securities.
4. Market risk associated with possible fluctuations in interest rates both in hryvnia and in foreign exchange rates.
In addition, when financing a specific project in the business plan, it is recommended to analyze the following types of risks: the risk of non-viability of the project, tax risk, the risk of non-payment of debts, the risk of non-completion of construction. All factors that, to a certain extent, affect the growth of the degree of business risk can be divided into objective (external) and subjective (internal).
TO objective factors include those that do not directly depend on the enterprise itself: inflation, competition, scientific and technological progress, political, economic and social situation, legal framework for investment, ecology, tax and customs legislation, etc.
TO subjective factors include those that directly characterize the given enterprise: production potential, technical equipment, level of subject and technological specialization, labor organization, labor productivity, degree of cooperation, state of safety, choice of the type of agreements with partners, contractors, etc.
After identifying the specific risks inherent in this project, and the factors affecting these risks, it is necessary to analyze them. Risk analysis is divided into two complementary types - quantitative and qualitative.
Qualitative analysis - this is the definition of the stages and works during which the risk arises, as well as the very moment of its occurrence.
Quantitative analysis risk is a numerical determination of the size of individual risks and the risk of the project as a whole. In quantitative risk analysis, various methods can be used, the main of which, in addition to the already mentioned specific ones, are well known: statistical, balance, method of expert assessments, analytical, method of analogs, execution of a decision tree.
In the practice of project management, there are three ways to reduce risk: distribution of risk between project participants - transfer of part of the risk to co-executors; insurance - property and accident; reservation of funds to cover unforeseen expenses - creation of a general and special reserve fund.
Olga Senova, economics consultant at Alt-Invest LLC. Magazine« CFO» No. 3, 2012. Pre-print version of the article.
Investment risk is the measurable likelihood of incurring a loss or missing out on an investment. Risks can be divided into systematic and non-systematic.
Systematic risks- risks that cannot be influenced by the influence of the object management. Always present. These include:
- Political risks (political instability, socio-economic changes)
- Natural and environmental risks (natural disasters);
- Legal risks (instability and imperfection of legislation);
- Economic risks (sharp fluctuations in exchange rates, government measures in the field of taxation, restrictions or expansion of exports and imports, currency legislation, etc.).
The amount of systematic (market) risk is determined not by the specifics of an individual project, but by the general situation on the market. In countries with a developed stock market, to determine the degree of influence of these risks on a project, the coefficient? Is most often used, which is determined on the basis of stock market statistics for a specific industry or company. In Russia, such statistics are very limited, therefore, as a rule, only expert estimates are used. If there is a high probability that a particular risk will materialize, if possible, additional measures are envisaged to mitigate the negative consequences in relation to the project. It is also possible to develop scenarios for the implementation of the project with different development of external conditions.
Unsystematic risks- risks that can be eliminated partially or completely as a result of the impact from the management of the facility:
- Production risks (risk of non-fulfillment of planned works, failure to achieve planned production volumes, etc.);
- Financial risks (the risk of not receiving the expected income from the project, the risk of insufficient liquidity);
- Market risks (changes in market conditions, loss of market positions, price changes).
Unsystematic risks
They are more manageable. By their impact on the project, they can be divided into several groups:
The risk of not receiving the expected income from project implementation
Manifestation: negative NPV (the project is not effective) or an excessive increase in the payback period of the project.
This group of risks includes everything related to the forecast of cash flows in the operational phase. It:
Marketing Risk - the risk of receiving less revenue as a result of not reaching the planned sales volume or reducing the selling price relative to the planned one. Since the profit of the project (and to the greatest extent the profit is determined by the revenue) determines its effectiveness, then marketing risks are the key project risks. To reduce this risk, it is necessary to thoroughly study the market, identify key factors that can affect the project, forecast their occurrence or increase, ways to neutralize the negative impact of these factors. Possible factors: changes in market conditions, increased competition, loss of market positions, decreased or no demand for the project's products, reduced market capacity, lower prices for products, etc. Assessment of marketing risks is especially relevant for projects to create a new production or expand an existing production. As a rule, these risks are studied to a lesser extent for projects to reduce costs in existing production.
Example: When building a hotel, marketing risks relate to two characteristics: price per room and occupancy. Suppose an investor has determined a price for a hotel based on its location and class. Then occupancy will be the main factor of uncertainty. The risk analysis of such a project should be based on the study of its ability to "survive" at different values of occupancy. And the spread of possible values should be taken from the market statistics for other similar objects (or, if statistics could not be collected, the boundaries of the spread of occupancy will have to be set analytically).
- The risk of exceeding the production cost of products - production costs are higher than planned, thereby reducing the profit of the project. A cost analysis is needed, based on a comparison with the costs of similar enterprises, an analysis of the selected suppliers of raw materials (reliability, availability, the possibility of an alternative), and a forecast of the cost of raw materials.
Example: If among the raw materials consumed by the project there are agricultural products or, for example, a significant share of the cost price is occupied by petroleum products, then it will be necessary to take into account that the prices for these raw materials depend not only on inflation, but also on specific factors (harvest, conditions on the energy market, etc. etc.). Often, fluctuations in raw material costs cannot be fully transferred to the price of the product (for example, confectionery production or boiler room operation). In this case, it is especially important to study the dependence of project results on fluctuations in cost.
- Technological risks
- risks of shortfall in profit as a result of failure to achieve the planned volume of production or an increase in the cost of production in connection with the selected production technology.
Risk factors:
Features of the applied technology - maturity of technology, features associated with the technological process and its applicability under specified conditions, the compliance of raw materials with the selected equipment, etc.
Equipment supplier's dishonesty- Delays in the delivery of equipment, delivery of low-quality equipment, etc.
Lack of available service for the maintenance of the purchased equipment- remoteness of service departments can lead to significant downtime of the production process.
Example: Technological risks of building a brick factory in conditions when there is already a building for placing the equipment, the sources of raw materials have been studied, and the equipment is supplied in the form of a single turnkey production line by a well-known manufacturer, will be minimal. On the other hand, the project for the construction of a plant in conditions when only a place has been outlined for the placement of quarries, where raw materials will be mined, it is required to build a plant building, and equipment will be purchased and assembled on their own from different suppliers, are huge. In the latter case, the external investor will most likely require additional guarantees or removal of risk factors (study of the situation with raw materials, attraction of a general contractor, etc.)
- Administrative risks - risks of loss of profit as a result of the influence of the administrative factor. The interest in the project of the administrative authority, its support by it, significantly reduces these risks.
Example: The most common administrative risk is associated with obtaining a building permit. Usually, banks do not finance commercial real estate projects before obtaining permission, the risks are too great.
Insufficient liquidity risk
Manifestation: negative cash balances at the end of the period in the forecast budget.
This type of risk can arise both in the investment and in the operational phase:
- The risk of exceeding the project budget ... Reason: more investment was required than planned. The level of risk can be significantly reduced by careful analysis of investments during the planning phase of the project. (Comparison with similar projects or industries, analysis of the technological chain, analysis of the complete scheme of project implementation, planning the amount of working capital). It is advisable to provide for the financing of contingencies. Even with the most careful investment planning, over budget by 10% is considered the norm. Therefore, in particular, when attracting a loan, it is envisaged to increase the limit of funds available to the borrower, selected if necessary.
- Risk of discrepancy between investment schedule and financing schedule ... Funding is delayed or insufficient, or there is a tight lending schedule that does not allow for deviations in any direction. In this case, it is necessary for own funds - advance reservation of money; for a credit line - provide in the agreement for the possibility of fluctuations in the timing of the withdrawal of funds under the credit line.
- The risk of a shortage of funds at the stage of reaching the design capacity ... It leads to a delay in the operational phase, a slowdown in the rate of reaching the planned capacity. Reason: Working capital financing was not considered at the planning stage.
- Risk of lack of funds in the operational phase ... The influence of internal and external factors leads to a decrease in profits and a lack of funds to pay off obligations to creditors or suppliers. When attracting credit funds for the implementation of a project, one of the main ways to reduce this risk is to use the debt coverage ratio when constructing a loan repayment schedule. The essence of the method: the possible fluctuation of the funds earned by the company in the period is established in accordance with the expectations of the market and economic situation. For example, with a coverage ratio of 1.3, the company's profit may decrease by 30% while maintaining its ability to repay obligations under a loan agreement.
Example: Building a business center may not seem like a very risky project if you only look at price fluctuations. On average, over the period of its existence, price fluctuations will not be so great. However, a very different picture emerges when you consider the rate of rent and the combination of income with payments. A business center built on credit funds can easily go bankrupt due to a relatively short-term (compared to the life of its operation) crisis. This is exactly what happened with many objects, the start of which took place at the end of 2008 and 2009.
Risk of non-fulfillment of planned works during the investment phase for organizational or other reasons
Manifestation: delay or incomplete start of the operational phase.
The more complex the project under consideration, the more requirements are imposed on the quality of project management - on the experience and specialization of the team implementing this project.
Ways to reduce this type of risk: selection of a qualified project management team, selection of equipment suppliers, selection of contractors, ordering a turnkey project, etc.
We examined the main types of risks present in investment projects. It should be noted that there are many classifications of risk. The application of a specific classification in a business plan is determined by the specifics of the project. You should not get carried away with a scientific approach and give numerous complex qualifications. It is more expedient to indicate exactly those types of risks that are most significant for this investment project.
For all the selected types of risk in the business plan, an assessment of their magnitude is given for a given investment project. It is most convenient to give such an assessment not according to the point scale of risk and through its probability, but through the assessment of "high", "medium" or "low". This is due to the fact that such a verbal, and not a numerical, assessment is much easier to prove and justify than, for example, the probability of a risk occurrence of 0.6 (the question immediately arises as to why exactly 0.6, and not 0.5 or 0, 7).
The main risks described in the investment project
Macroeconomic risks:
- market fluctuations
- changes in currency and tax legislation
- decrease in business activity (slowdown in economic growth)
- unpredictable regulatory measures in the areas of legislation
- adverse socio-political changes in a country or region
Risks of the project itself:
- changes in demand for products, works, services that are the source of the project's income
- changes in pricing conditions; changes in the composition and cost of resources, including material and labor
- condition of fixed assets
- structure and cost of capital financing the project
- mistakes in the construction of logistics
- weak management of the production process; increased activity of competitors
- inadequate system of planning, accounting, control and analysis
- inefficient use of property; dependence on the main supplier of material resources
- ineffectiveness of staff
- lack of staff motivation system
This list can be continued depending on the specifics of the implementation of a particular investment project.
Risk is the likelihood of an adverse event that may lead to the loss of some resources, loss of income or the appearance of additional costs. An investment project is always accompanied by all kinds of risks. The presence of a risk factor is the reason that all firms are forced to carefully analyze all investment projects. Investment risk assessment is a mandatory part of all business ideas, business plans and business projects. The purpose of this section is to tell future investors or creditors of the firm about possible risks on the way of project implementation and the main methods of protection from their influence. When writing this section, an entrepreneur should highlight the following main points:
1. Provide a list of possible risks, indicating the likelihood of their occurrence and the expected damage from this.
2. Indicate organizational measures to prevent and neutralize these risks.
3. Present a risk insurance program.
Issues related to risks, their assessment, forecasting and their management are very important, since the investors (lenders) of the firm want to know what problems the firm may face and how the entrepreneur expects to get out of this situation.
The depth of analysis of the level of business risks depends on the specific type of activity of the entrepreneur and the scale of the project. For large projects, a careful calculation of risks is required using a special mathematical apparatus of the theory of probability. For simpler projects, risk analysis using expert assessments is sufficient. The main thing here is not the complexity of the calculations and not the accuracy of calculating the probability of failures, but the entrepreneur's ability to predict in advance all types of possible risks that he may face, the sources of these risks and the moments of their occurrence. And then, develop measures to reduce the number of these risks and minimize the losses that they can cause.
The range of risks is very wide, and the probability of each type of risk is different, as well as the amount of losses that they can cause. Therefore, the entrepreneur is required to at least roughly assess what risks are most likely for him and what they (if they arise) can cost the company.
To do this, you need to do the following:
1. Identify a complete list of possible risks.
2. Determine the likelihood of each occurrence.
3. Estimate the expected size of losses when they occur.
4. Rank them according to their likelihood of occurrence.
5. Establish an acceptable level of risk and reject all risks, the likelihood of which is below this level.
After analyzing possible risks and identifying the most significant among them, the entrepreneur needs to determine for each of them organizational measures for its prevention and neutralization.
As for insurance, it should be noted that in our country the insurance system is still extremely poorly developed. If in the coming years we will be able to create a modern system, it will simply indicate what types of insurance policies, for what amounts and in which insurance companies it is planned to purchase.
The range of risks is quite wide, from fires, earthquakes, etc. to strikes and ethnic conflicts, changes in taxation, fluctuations in exchange rates.
The most typical risks to which the company is exposed include, in aggregate:
1 . Risk of damage to buildings and structures.
2. Risk of failures, breakdowns of technological equipment.
3. Risk of damage to material costs.
4. Risk of disruption to the technological process.
5. The risk of mastering new equipment and technology.
6. Environmental risks.
7. Risk during construction and installation works (CMP).
8. Financial risks (non-payments, etc.).
9. Risks of working with cash
10. Risk of damage during transportation.
11. Risk of vehicle operation.
12. Risk of damage to employees of the enterprise.
13. Risk of Damage to Others.
14. Military risks.
15. Political risks.
The quantitative measurement of risk makes it possible to evaluate investment projects taking into account risk. In practice, 3 methods of risk accounting are mainly used in the analysis of projects.
Methodology for risk adjustment of the discount rate. According to this method, the cost of capital for the company is first established, which is assumed to be equal to the risk-free discount rate, then the risk premium is added to it. The amount of the premium can be set by an expert, depending on the type of investment, the risk premium is independently assigned. For example, with a cost of capital of 15%, the discount rates might look like this:
Mandatory investments - not applicable;
Reducing the cost of goods - 12%;
Expansion of production - 15%;
New products - 20%;
Scientific developments - 25%.
A company's cost of capital reflects the company's overall risk. The company's overall risk is generally associated with large investment projects, such as plant expansion, and the risk associated with cost-cutting projects is usually lower than the company's overall risk. But investing in a new product is a step into the unknown, so the risk premium reaches 1/3 of the cost of capital. The most risky investments are investments in research and development and the risk premium is taken in the range of 60-80% of the cost of capital. When determining the premium, the basic principle is that the more uncertainty in the project, the higher the risk premium.
Thus, the technique looks like:
The initial cost of capital (IC) is established;
The risk associated with the given project R risk is determined;
NPV of the project is calculated taking into account the discount rate equal to
r = CK + R risk;
A project with a large NPV is considered preferable.
Probabilistic method of project assessment taking into account risk. This method is based on cash flow simulation. The analysis technique in this case is as follows:
For each project, three possible development options are built: pessimistic, most probable and optimistic;
For each option, the corresponding NPV is calculated, i.e. three values are obtained: ChTS p, ChTS v, ChTS o;
For each project, the range of NPV variations is determined by the formula
Of the projects under consideration, the one is considered the more risky, with a larger NPV variation range.
There are several modifications of the considered methodology, involving the use of quantitative probabilistic estimates. In this case, the technique is as follows:
For each option, pessimistic, most probable and optimistic cash flows are calculated and the corresponding NPV for them;
For each project, the probabilities of their implementation are assigned to the values of NTS n, NTS c, NTS o;
For each project, the mathematical expectation of the NPV is calculated, weighted by the assigned probabilities and the standard deviation (RMS) from it;
The project with the highest RMS value is considered more risky.
In this case, by expert means we pass the project through the “filter” twice. First, we make a probabilistic assessment of cash flows, and then analyze the NPV in a probabilistic aspect. Naturally, in this case, there is a danger of making a significant subjective error.
Methodology for changing cash flow. According to this method, in a probabilistic aspect, the cash flow of each year of the compared projects is estimated. Then the adjusted cash flow of the projects is compiled, for which NPV is calculated. The preference is given to the project, the adjusted cash flow of which gives the highest NPV, this project is considered less risky.
I would like to warn you that in the presence of risk, it is quite difficult to assess projects reliably. The fact is that the probabilities of events are established by an expert method, and an expert, like any person, can make mistakes for both subjective and objective reasons. Whatever it was, taking into account risk when analyzing a project is a necessary procedure. It makes the analyst think about the project comprehensively, helps to see the "shadow" sides, weaknesses of the project. In addition, a comparative analysis of alternative projects is more often carried out and the mistakes made in the analysis will be the same for all projects, but the assessment will be carried out taking into account all the factors, and as you saw in the above examples more than once, taking into account additional factors often leads to opposite decisions to the original ones.
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