Taking risks in business

By: Laddie Blaskowski

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Entrepreneurs, just by their very nature, are greater risk takers than the average person on the street. In most cases, the process of starting a business requires that the owners put everything they have worked for on the line, based on a belief that their efforts will lead to success. And once the risk of starting up is over, other risks…with the potential of even greater opportunity…continue to tempt business owners.

Large contracts, new products, partnerships, and expansions into new markets are just a few of the reasons entrepreneurs need to take a serious look at placing the business at risk again. When an opportunity comes along, the hard question is, “Is the risk worth the possible reward?” Although there is no foolproof way to answer this question, when the following six questions are answered honestly, making a decision becomes easier.

What is my tolerance for risk? This is the first and most important question that must be asked. One business owner may be content putting his business on the line every year, while another person may be unwilling to put her business at risk unless the probability of success is very high. Both are correct.

To succeed at a venture, especially one that involves substantial risk, you need to understand how you feel as you go through the process. If high stress, unhappiness and sleepless nights will be the end results of the decision, it is obvious that the opportunity is not worth the reward. And a successful outcome is less likely.

What is the probability of failure? It is this question that burns most business owners because they are not honest with themselves when they answer it. Many opportunities have come wrapped in paper that says, “You Can’t Lose!” When a person starts to believe the wrapping paper, it is obvious they have not completed their homework.

One hard rule every entrepreneur needs to follow is: If you do not have the time to determine what the downside is, pass on the opportunity.

What could be done to reduce the risk? Although it may appear so at the time, risks are seldom fixed. If you look at the opportunity creatively and objectively, there are often many ways to decrease the downside and reduce the risks.

For example, when a manufacturer of plastic molded parts was offered a large government contact, the company needed additional capacity that was going to cost over $500,000. Although the contract was lucrative and expected to last for years, it contained a clause stating that it could end with a 90-day notice. After carefully reviewing the situation, the company decided to reduce its risk by subcontracting with a competitor to make some of the parts. By sharing some of the profits, the risk was substantially decreased.

What is the contingency plan? Even though the majority of time and effort spent evaluating an opportunity will not, and should not, be directed towards the downside, it is important to have a back-up plan. The contingency plan needs to start with the question, “If the worst were to happen, what could I do to recover?”

From there, a step-by-step plan can be designed. The major value of having a contingency plan is that if the ship starts sinking, benchmarks and plans to take action have already been devised. A contingency plan can also help keep you focused on going forward with the knowledge that a back-up plan is in place.

What do your trusted advisors think? At times like this, you need to rely on the opinions of your advisors. Talking to the company’s accountant, banker, attorney, or other “solid” business people can provide a wealth of information based on their professional or life experiences.

The purpose of listening to these individuals is not necessarily to do what they say, but to build a foundation of information upon which to base the decision.

What do your instincts say? No matter how crazy it may sound, you need to listen to one more opinion source—your gut-feeling. Many great businesses were formed despite conventional wisdom that said they were impossible.

Fred Smith created overnight service with Federal Express when everyone said it couldn’t be done and no one would pay for it. Disney World was started despite comments that no one would want to go to central Florida for a vacation. This is not to say these individuals jumped in blindly. Just the opposite is true. Each one listened, researched the pros and cons, and understood what had to be done in order to succeed. However, parts of their decisions were based on their gut-feelings that the rewards were worth the risk.

If your instincts and mind do not agree, stop and determine what could be causing the difference. Although there may be no scientific proof as to why instincts are correct, they are often the results of information missed by the conscious mind. If, despite all of the positive information something stills feels wrong, think twice…or three or four times…before risking your business.

Are the answers to these questions foolproof? Of course not. That’s why they call it risk. But by answering these six questions, chances are you will be right more often than not.

BusinessTruth® : Opportunity equals risk. You must manage it wisely.