What is risk?
A risk is a chance that something goes wrong and causes a loss. The loss can be money, time, health or reputation (what people think of you). Risk is about the future. It is not certain.
Every plan has risk. A business that wants to grow, launch a new product or buy a new machine takes on new risk. Risk can lower profit, sales or quality. So improving performance is never fully risk-free.
Types of risk
External risks (from outside)
- Demand risk: customers stop buying, or a competitor comes.
- Obsolescence: your product or machine becomes old-fashioned. Example: film cameras after phones.
- Technology change: a new technology makes your way of working slow or costly.
- Supply and energy dependence: you rely on one supplier or on fuel whose price can jump.
- Natural and environmental risk: floods, heat waves, and new rules about pollution.
Internal risks (from your own decisions)
- Bad hiring, poor planning, borrowing too much, ignoring safety.
Personal risks
- Illness, accident, loss of a job, theft, fraud online.
A business can also harm the planet (its environmental footprint). That creates risk too: fines, angry customers, and lost trust.
Measuring risk: the risk matrix
Give each risk two marks from 1 (low) to 3 (high):
- Likelihood: how probable it is.
- Impact: how bad the loss would be.
Risk score = likelihood × impact. Put risks in a grid. Green (1–2) is low, yellow (3–4) is medium, red (6–9) is high. Deal with the red ones first.
Risk appetite and the four treatments
Risk appetite means how much risk you are happy to carry. A young person with savings may accept more risk than a family with one income. A start-up may accept more risk than a hospital.
- Avoid: do not do the risky thing at all.
- Reduce: make it less likely or less harmful: training, safety gear, backups, a second supplier, diversifying (not putting all eggs in one basket).
- Transfer: pass the loss to someone else, mainly through insurance, or through a contract.
- Accept (retain): keep small risks and save an emergency fund to cover them.
Then monitor: check the risks again regularly, because they change.
Try it: your own risk matrix
Pick a plan: a school trip, a small online shop, or a cycle ride to school. Write 5 things that could go wrong. Give each a likelihood (1–3) and an impact (1–3). Multiply. Circle the top two and write one treatment for each. Then check your answers with the free-play step of the 3D.
Key formulas and definitions
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Worked examples
1. A shop rates "fire in the store" as likelihood 1, impact 3. Score and zone?
Score = 1 × 3 = 3, medium. Treatment: buy fire insurance (transfer) and keep an extinguisher (reduce).
2. A factory buys all its parts from one supplier abroad. Which type of risk is this and how can it be reduced?
Supply dependence (external). Reduce it by finding a second supplier or keeping extra stock.
3. A family is deciding whether to put all savings into one company's shares. What risk advice fits?
This concentrates risk. Diversify: spread money over several safe and less-safe options, and first keep an emergency fund. (This is general education, not personal financial advice.)
Common mistakes
- Thinking risk means a loss that already happened. Risk is a possible future loss.
- Adding likelihood and impact instead of multiplying them.
- Believing insurance removes risk. It only transfers the money loss; the event can still happen.
- Treating all risks the same. Deal with high-score risks first and accept tiny ones.