Methods of Risk Analysis and Their Use in Investment Project Decision-Making. Sensitivity Analysis and Scenarios.
Sensitivity analysis enables the determination of the impact of key variables (e.g., prices, sales volumes) on the financial indicators of a project. This procedure assists in identifying the factors that have the most significant influence on a company’s success and resilience to changes in the external environment. This tool is suitable for all investment projects, particularly those in which numerous aspects can affect the outcomes.
Scenario analysis explores various possible scenarios to determine how changes in the external environment can affect the project. This process allows a company to prepare for different situations by developing a strategy to respond to changing market conditions. Such event assessment is suitable for enterprises operating in unstable conditions.
The Use of Risk Analysis in Investments
A qualitative and in-depth assessment of the risks associated with any investment project is a necessity for any company striving to maintain its competitiveness and market resilience. Through this process, an enterprise gains:
- Risk assessment, enabling the determination of the probability of threats affecting the project.
- Decision-making that helps identify opportunities for project improvement and the development of strategies to mitigate threats.
- Detailed analysis that can enhance the project’s appeal to potential investors.
- The development of strategies for various scenarios, making the company prepared for any market conditions.
- Informed decision-making based on the obtained data, which positively impacts the company’s productivity.
The Practical Application of Risk Analysis and Scenarios
In a business environment characterized by constant change, the use of risk analysis and scenario planning is an integral part of strategic planning. This method enables companies to identify potential threats, develop flexible plans, and be prepared for various developments. Well-planned and adaptable strategies ensure the resilience of the business and contribute to the successful achievement of long-term goals. The process consists of several stages: identification, forecasting, analysis, and monitoring
Identification of risks and possible scenarios
The first step is to bring experts and stakeholders together as a team to discuss and identify potential hazards. All likely events are divided into groups (e.g. financial, technological, market) to organize a more systematic approach.
Forecasting developments
The company needs to identify the key factors that may affect the business (e.g. changes in resource prices). The established committee should develop different scenarios taking into account all major aspects, such as market growth or decline, as well as changes in legislation.
Conducting the analysis
Responsible individuals need to assess how each risk affects different scenarios, such as loss of revenue or customers. Next, the impact of the situation on indicators such as operational processes and the company’s reputation is considered.
Strategy development
The team should create a specific action plan to manage the identified risks and scenarios. Responsible persons and timelines for implementing the actions should be identified. New strategies should allow the company to adapt to different scenarios.
Monitoring and updating
The entire process of analyzing, adapting and responding to risks needs to be monitored. This is necessary to continue to monitor the implementation of strategies and changes in the environment, and to update strategies.
What the company gains
Conducting a business risk and scenario analysis provides a company with an understanding of the possible threats and chances presented in the market. This approach helps build sustainable strategies that help the company adapt to change, ensuring long-term sustainability and successful growth. The organization gains confidence in making informed decisions, increasing the benefits of opportunities and minimizing the impact of negative factors. The application of analytical tools contributes to increasing the competitiveness of the enterprise and strengthening its position in the market.
