Risk Evaluation

Risk evaluation is to manage risk by creating the relationship of risk with the benefits of any type of business. You know every type of risk can be measured on the basis of probability. We can only estimate the risk. Now, for better result, we have to compare it estimated return from business.

So, risk evaluation is to way process, one side, we measure the risk and second side, we compare it with the performance of our business result. If risk is high and impact on profitability is low, we need not to select such investment project.

Risk evaluation is also called risk assessment because in risk evaluation, we take steps to find all types of  Dangers for stopping it before happening. There are two types of risk evaluation.

1. Quantitative Risk Evaluation

In quantitative risk evaluation, we calculate the probability of loss in our currency if we will start specific type of business or buy any fixed asset or invest our money in any investment project.

2. Qualitative Risk Evaluatioin

Under this evaluation, we also measure the risk of qualitative loss. For example, we are accounting form and if we have invested big amount in any company's accounting software. If there is any default in it. Due to this, we suffer loss of $ 1,00,000 due to legal claim or wrong record of customers. It will be quantitative but there is also loss of reputation of our accounting form which will be our loss because in the long run, no one will trust on us. So, this is qualitative loss, so, it should also measure and try to best to control it.

Formula of Risk Evaluation 

Risk Evaluation  =  Probability of Loss

Importance of Risk Evaluation

1. Importance in Insurance Sector

Insurance companies has to pay the big amount if any loss of businessman will happen. If loss is not calculated with scientific way, insurance company can insolvent in one day. For example, insurance company has fixed fire  insurance premium very low to wood company. Due to mishappening, in one month 90% of wood companies factories captured under fire. But insurance company has no asset to pay them together. So, insurance company has to sell his all assets and each wood company get only 25% total loss amount. So, on the basis of risk evaluation, insurance companies can take better premium decisions.

2. Importance in Health Sector 

Provide healthy food and give food for all is the responsibility of Govt. On the basis of risk evaluation, Govt. can estimate the future risk of food safety. So, with this, Govt. take advance decisions to control it.

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Accounting Education: Risk Evaluation
Risk Evaluation
Accounting Education
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