The Entreprenuerial Way – Understanding Business Risk

Perseverance is not a long race; it is many short races one after the other ~ Walter Elliot

Understanding Business Risk

Whenever we talk about business, we are also talking about risk. All successful entrepreneurs are risk takers. They believed in their dreams and take deliberate and calculated steps towards achieving their business goals.

Attitude To Risk

What is your attitude to risk? Are you –

  • Risk-averse or risk-avoiding. You prefer certainty and have a low propensity to take risk
  • Risk-neutral and are more concerned about the return on your investment than the risk involved
  • Risk-loving or risk-seeking person who will still go ahead despite the high probability of a financial loss

It doesn’t matter how brilliant your business idea or plan is, it certainly is is not immune to some measure of risk. Remember that starting or running a business is an adventure into the future and there is always uncertainty about future outcomes.

Before You Start

Before you start your business, you need to identify

  • The likely risk factors
  • The magnitude of the threat
  • The possible ways of mitigating against these risks.

Depending on your attitude to risk, you will be pleased to hear that high risk ventures will often come with the chances of high rewards. Don’t just gamble, understand the risk involved in what you are heading into.

Common Business Risk

When you decide to start a business, you can be carried away by excitement and optimism about a positive outcome and you forget to carefully assess the downside. It doesn’t matter how experienced you are as an entrepreneur, a careful assessment of the risk involved will save you a lot of heartache and headache in the future.

So here are some business risks you need to be aware of.

#1. Financial Risks

The risk of a financial loss is one in which every business owner is exposed to. The initial capital invested in a business start-up, may be from the savings of the owners, money borrowed from other people as soft loans, money borrowed from the bank which is secured and the unsecured loans borrowed by using your credit card to fund your initial business activities.

Some or all of this capital investment may be lost. No one plans for failure, but business failure is a common, even amongst bigger and better resourced organisations.

As a business person myself, I have started businesses that have made financial losses. Even my successful businesses have had periods when it seems to be heading to a financial loss. This is by no means an attempt to scare you, but a cautionary contribution to your success.

#2. Debt Risks

Debt risk in business is closely associated with financial risks. Debt can be a burden for businesses as you get saddled with interest and capital payments that could spiral out of hand. In the world of easy money, debt financing is a tempting way of throwing money at business problems or financing growth strategies.

There is no doubt that you may need to borrow money to finance your business, however, make sure you are disciplined about sticking to your proposed repayment plan. Remember that it is other peoples money and they will want it back at some point in time.

Your bank and other financial institutions will continue chasing you to borrow money even when you do not need it.

#3. Product Risks

This can be due to the product or service you offer bringing in less money than you spend to produce and sell it. Continuous low volume of sales is a clear indication of an impending product failure.

Here are a few reasons why your product or service may not sell enough units:

  • Overestimation of the market size
  • Underestimation of the competition
  • Lack of product differentiation leading to a price war
  • Unanticipated changes in customer behaviour
  • Changes in regulations

#4. Environmental Risks

Environmental risks can come from three sources.

  1. Risk imposed by the global environment – An example of this is the global financial crisis of 2007-2008. This included the bursting of the US housing bubble, the collapse of the world financial markets and the European sovereign-debt crisis. What followed was the 2008-20012 global recession.
  2. Risk imposed by country of National conditions – This has a more direct effect on businesses. It includes things such as taxes, trade regulations or deregulation, government policies, infrastructural provision, market access and politics. There are times when government provides grants and other subsidies to stimulate local economic growth. At other times a slowdown in economic activity is encouraged by increases in interest rates and value added tax.
  3. Risk imposed by the internal workplace environment – Workplace culture, politics and your business processes may have a positive or negative effect on your business. The dominance of one single individual, often the founder or owner can cause bottlenecks and stifle the growth of the business

#5. Human Risks

I have often said and will continue to say that people are your greatest assets and your greatest liabilities. It is through the enthusiastic support of people who are your investors, employees and customers that businesses are built.

There have also been stories of great and small companies that have been mismanaged, sabotaged or ruined by people that were entrusted with the management of the business.

Human problems in a business can also start with the business owner. These include issues of insufficient planning, wrong strategies, complacency and financial indiscipline.

What Next?

I started off with risk and I will end with risk. Having made you aware of some of the risks of starting your own business, you will need to decide based on your attitude to risk if owning your own business is for you.

Risk is twinned with reward. Do your homework, take a decision and then take the steps towards the fulfilment of your dream of owning your own business.