ENTREPRENEURSHIP / MAY. 06, 2014
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How to Gain Control of the Risks Involved with Entrepreneurship

There’s a lot to like about entrepreneurship. It’s exciting. The rewards are directly related to your effort (and a bit of luck). You’re the boss. It’s challenging. And the potential payout can be huge. What’s not to like?!

Hang on there, cowboy. Before you head in guns a-blazin’, you need to take stock of what you’re doing. The risks involved. And most importantly, how to gain control of those risks. So, what are the potential dangers? Any good entrepreneur knows that a risk management assessment plan is crucial as they move forward. There’s no magic formula for removing risk (if there was, there would be no failure). It’s all about asking (and honestly answering) the right questions.

Types of Risk

There are essentially four main groups of risk in the business world. As an entrepreneur, you need to identify them, and have a “worst case scenario” contingency plan for each one.

  • Operational Risks
  • Financial Risks
  • Strategic Risks
  • Compliance Risks

What are Operational Risks?

Operational risks refer to the day-to-day running of your business. Your physical space, the required machinery, both office and production, your staff, daily administration, IT requirements, your supply chain, accounting controls and procedures, data and account security, distribution of your product and  Research and development.

Assess each step in the system, and brainstorm a list of potential risks and dangers. What’s the procedure if the machine responsible for the bulk of your production broke down? What if the company that built it for you went out of business? What would you do?

Have you considered natural disasters that could negatively impact your business? Hurricanes, earthquakes, mudslides, fires, and droughts (among others) could knock out your distribution system, or your supplies, or your production facility. Are you prepared for it? Do you have insurance?

Are you located (or have satellite branches or factories) in politically unstable regions? Is that 100% necessary? Would a shutdown or loss of the branch or factory have a huge impact overall? How can you avoid it or recover from it?

What are Financial Risks?

Financial risks obviously refer to money such as Cash flow, Investors, Bank loans, Income, Price points and Debt. Taking a good, long, honest look at your finances and determining potential landmines is perhaps the single most important step you can take to gain control of the risks involved with your business. What would happen if a major investor suddenly pulled out? What if the bank recalled your loan? Examine the cash flow...is it too dependent on any one area? Are you existing “paycheck to paycheck”, as it were? Are you solely dependent on your customers and clients paying on time, or never reducing the volume or amount of their purchase? They might so be prepared.

Do you, personally, have enough money to see you through some lean times? As the entrepreneur, you’re expected to invest your own time and money, and it might be a while before you see any of that back. Can you handle it? And if the unthinkable happens and your business fails, who is on the hook? Is it you alone? 

What are Strategic Risks?

Your business has a plan, right? A strategy for development and growth? Strategic risks exist whenever you operate within an industry or niche. You research your competition, their products, the target market, what it can support (in terms of product and price). But what if that changes? How much would it affect your business if another major player entered your market within the first six months of your business? What would you do to recover? Let’s say, for example, that you develop a better, more secure cloud storage system. Everything is going well, but then Dropbox lowers their monthly fee and releases an improved encryption program. What do you do to counter the effect?

Having too many large and firmly established competitors is also a strategic risk. It doesn’t automatically mean that you should look elsewhere, but it will definitely make things tough. Does the world really need another cloud storage provider that essentially offers exactly the same product as Dropbox, Box, Google Drive, OneDrive, SugarSync, Cubby, Tresorit, and Mega Drive...you get the idea. Likewise, though, if there are absolutely no competitors. Are you sure that the market and demand exists? Does the established pricing tier basically price you right out of competition?

What are Compliance Risks?

Unfortunately, no one is an island unto themselves. We all have to follow the rules. In the business world, that can be a blessing and a curse. It’s a blessing because it means everyone - big and small alike - have to play by the same system. No unfair advantage. It’s a curse because it puts you at the mercy of outside sources (government agencies, labour boards, unions, etc.). You have to comply with the regulations that exist in your industry, country, and city...whether you like it or not. The danger lies in what happens if they suddenly and unexpectedly change. New taxation rules, import duties or restrictions, Increased minimum wages and Substances being deemed illegal, controlled or dangerous.

What, if anything, exists in your business that could be affected by changes in law or regulations? How would you cope?

In order to gain control of the risks, and there are many, you need to identify them, assess them, prioritize them, and ultimately either transfer, reduce, eliminate or accept (if there is no solution other than hoping it won’t happen) them. As an entrepreneur, you’ll have to live with risk. It’s what you do before it actually happens that will dictate your success or failure. Contingency plans should exist for the major risks involved with your specific business, industry, and location. Get it done before you need it.

 

Photo by keep_bitcoin_real

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