Risk Analysis

Risk Analysis Overview

What Is Risk?

Uncertainty about a situation can often indicate risk, which is the possibility of loss, damage, or any other undesirable event. Most people desire low risk, which would translate to a high probability of success, profit, or some form of gain. Risk is the possibility of loss, damage, or any other undesirable event. For example, if sales for next month are above a certain amount (a desirable event), then orders will reduce the inventory, and there will be a delay in shipping orders (an undesirable event). If a shipping delay means losing orders, then that possibility presents a risk. Thus, there are two points to keep in mind when analyzing risk: 1. Where is the risk? 2. How significant is the risk Almost any change, good or bad, poses some risk. Your own analysis will usually reveal numerous potential risk areas: overtime costs, inventory shortages, future sales, geological survey results, personnel fluctuations, unpredictable demand, changing labor costs, government approvals, potential mergers, pending legislation. Once the risks have been identified, a model can help you quantify the risks. Quantifying risk means putting a price on risk, to help you decide whether a risk is worth taking. For example, if there is a 25% chance of running over schedule, costing you a $100 out of your own pocket that might be a risk you are willing to take. But if you have a 5% chance of running over schedule, knowing that there is a $10,000 penalty, you might be less willing to take that risk.

What Is a Model?

Crystal Ball works with spreadsheet models, specifically Microsoft® Excel spreadsheet models. Your spreadsheet might already be a model, depending on what type of information you put in your spreadsheet and how you use it. Data vs. analysis If you only use spreadsheets to hold data -- sales data, inventory data, account data, etc., then you don't have a model. Even if you have formulas that total or subtotal the data, you might not have a...