How Should You Approach Risk in New Business Ventures?

Starting a new business venture? It’s an exciting time but like all new opportunities, it also has some risks - and being aware of them will make you stronger. The following are some of the recommended ways of smoothing the process and giving you peace of mind.

Identify the Key Risks 

Each new business idea you come up with probably fills you with optimism but there’s bound to be some doubts nagging at the back of your mind. Don’t ignore them! Instead, you should start facing up to them by looking at them one by one. This will let you consider which are genuine risks.

You might want to start by putting them into categories. This explanation of business risks covers many areas such as market changes, problems with the economy, and increased competition. Basically, anything that could expose you to a drop in profits - or going out of business altogether - is a risk you’ve got to account for. We’ve got four main categories: strategic risk, compliance risk, operational risk, and reputational risk.  

The importance of each category varies according to the area you want to work in. For example, if you plan to move into the retail world then your reputation is going to be vital, while the operational side of things is going to be crucial if you’re involved in large-scale transport or storage work. 

Once you’ve put the main risks into those categories, the next question is to work out how important each of them is. This is done by considering what impact it could have on the company’s profits if things go wrong. By doing this, you should start to get a clearer vision of the risks that lie on the horizon. Remember that not all risks are equal, and they won’t all have an equal impact on your bottom line. 

This look by the Harvard Business Review at risk management starts with the story of new BP CEO Tony Hayward making safety his main priority. One way this was done was by advising employees not to walk with coffee cups without lids. A few years later, the company suffered a disaster with the Deepwater Horizon oil rig explosion. One of the reasons flagged in the investigation was the way that management had stopped individual employees from being able to identify and communicate risks clearly. This goes to show that just adding new safety rules, without paying attention to the bigger picture, might not correlate to a culture of safety being a top priority. 

See How to Manage Them

Now that you’ve got a list of the main risks, let’s figure out how to manage them! Each will be handled differently, and you might like the idea of using these four methods: risk acceptance, risk transference, risk avoidance, and risk reduction. Each of these approaches is useful in certain situations. For example, risk reduction could mean implementing a quality control system or creating a customer feedback process to lower the risk of poor-quality products affecting your revenue.

Another example that fits many business areas is that of cash flow problems. If cash gets tied up in products or clients are slow in paying, it can have a devastating impact on just about any type of business. This can be managed by hiring an accountant and getting a solid and realistic financial plan in place. 

A cash flow statement tracking your money should be one of your most important documents. It needs to be updated constantly so that any changes are noted right away and can be acted upon. Having a backup plan such as a fresh line of credit or the option of using invoice financing will help you feel more relaxed about the matter. Some of the most successful people in history bounced back from failure, but avoiding failure in the first place is a much better option.   

Figure Out How Much You Can Afford to Lose

With any new business venture, you’ve probably got high hopes of it being a massive success that makes you the toast of the business world and brings that gold-plated mansion by the beach a step closer. That said, you’ve got to face up to the possibility that it won’t work out. If things don’t go to plan, then what’s the worst that could happen? You won’t be sipping cocktails on the beach, but it might be a lot worse if you lose everything you’ve invested, so a worst-case scenario is important in every risk assessment.

It’s also a good idea to understand volatility in the business world. This is typically expressed by the size and frequency of movement in the market, so it can be used to look at changing stock prices, customer demand, and more. What analogy can we find in other markets to help us understand business risk better? In online casinos, the highest volatility slots may have larger prizes but pay out less frequently than others. On the other hand, a low volatility slot pays more regularly but with smaller amounts each time you get a winning line. So, it’s about managing your money and your expectations, the same as it is in business. Think about volatility in relation to how much risk you’re happy taking to try and get the returns you’re hoping for. 

Risk is something that we simply can’t avoid in the business world, but we can look to manage it in sensible ways that lower the possibility of a risk turning into a disaster. Make risk one of your priorities and stop it from being something that could spring a nasty surprise at any point.

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