New business owners need to have the perfect balance between taking big risks that will pay off and being strategically cautious.
- Understand the major risk categories for businesses:
- Come to terms with some inevitable failures.
- Don’t underestimate the power of research!
Taking on any business venture involves some kind of risk. Entrepreneurs who think they can become insanely successful while only playing it safe still have a lot to learn. Yet big payoffs aren’t guaranteed when taking a significant risk—quite the opposite can and often does happen.
The most significant business risks include financial issues, competitive threats, and market and reputational risks. And any investor wants to see that a business owner has thought through these threats and has plans to avoid or deal with them.
How do you stay cautious and smart while still taking on exciting opportunities along the way? Here is a starter guide to managing business risk vs. reward.
1. Understand the categories of risk
First, all risks are not created equal. There are different levels and categories of business risk that you must identify and think through before balancing them vs. potential rewards. Here are some of the basics:
No one strategy perfectly fits with every type of company or industry. Part of the challenge is ensuring that your business plan is and stays relevant and up to date. What’s more, markets can change fast, putting you in a bind unless you’re willing to pivot strategy.
For new and old businesses alike, reputation matters to keep customers and score the new ones that enable growth. One small move can change perceptions for the better or worse. Any disappointment to a customer or prospect can impact a company’s reputation, leading to dramatic effects on the bottom line.
There are many financial risks involved in a new business. You have to weigh the pros and cons of having debt and applying for loans, putting work into finding investors, managing monthly cash flow, and investing money in the right business functions at the right time (like marketing versus hiring and recruitment). Often, financial risks are the most critical ones to any new or thinly capitalized venture.
One element related to financial risks is the need for growth. Owners have to make numerous decisions that could be hard now but will pay off big time in the future. You must carefully decide your approach—are you more concerned with short-term booms or playing it safe for a more certain long-term outcome? For example, if a business scales too fast, it may not deliver on promises to customers. At the same time, you also don’t want to risk competitors getting ahead of you while keeping your head down.
Markets fluctuate, sometimes in an instant. These shifts can be caused by changing consumer priorities and needs, economic upturns or downturns, new competitors, or “black swan events,” such as the recent pandemic. One product or service that’s hot this year may be old news in the next. A new competitor could come onto the scene with a lower price or a new technology.
Understanding the common and impactful risks and which ones may influence the bottom line is a crucial component of both starting and running a business. You can more successfully manage any threats by evaluating their likelihood and potential impact—and planning to address them proactively.
2. Come to terms with failure
Just because there is risk involved in a new venture doesn’t mean it’s not worthwhile. Even with the best plan and intentions possible, every business owner faces some level of peril. It’s impossible to avoid.
Because there’s no way to get around risk, it’s essential to embrace the fact that failure is likely going to happen—to some extent. The goal is simply to maintain those failures as temporary roadblocks, not catastrophes.
Nevertheless, many entrepreneurs plan as if they’ll never fail and are unpleasantly surprised when something goes wrong. It’s important to expect and prepare for mistakes—they’re going to happen. When you do run into a challenge, this point of view enables you to keep pushing through it. It also helps you recognize when something needs to change about your approach, which helps ensure a business (and its leaders) continues to grow.
3. Don’t underestimate the power of research!
The most effective way to avoid the biggest business risks is to have a plan. Push beyond the hypothetical and assess what would happen if a new strong competitor shows up or you experience a cash flow issue. How would you handle it? What steps would you take right away? What resources do you have to turn to in your network?
To create a plan that helps minimize or combat risks, plenty of research—and then some—is required. Pay close attention to who is leading your given market. What’s working for them and what isn’t? What are their biggest challenges at the moment?
Also, make sure to track consumer buying trends and customer preferences. For example, if you run a business where you meet with clients one-on-one, is it important to offer a virtual meeting option to stay competitive? It’s also valuable to survey target audiences. Ask them what’s most important to them right now and what they want to see from the businesses they support—including yours.
Every time a new opportunity presents itself, research it from every perspective. For example, if you’re considering making a new big purchase or investment, make sure to evaluate every option and think through the financial commitment. Sometimes, there’s a cheaper or better alternate route that will help minimize financial risk.
Finally, make sure to monitor and analyze the business’s track record. Implement processes for assessing vital operational and financial KPIs to see the rewards or setbacks you’re experiencing. This helps evaluate which risks to take on in the future and which to avoid based on experience.
Managed smartly, business risk is inevitable but valuable. After all, the reward side of the equation rarely exists without it.
Provident CPA and Business Advisors helps our clients pay the least amount of tax legally possible while assisting business owners as they implement comprehensive growth strategies. Contact our experienced team to learn more about our services.