Nikki Hall

Business is Risk: Part Two

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This is the 2nd in the series of Business is Risk. (Original story)

When a company owner is considering change in any way, large or small, the inherent risk involved has to be planned out well. The first step is defining for yourself what acceptable risk means to your company. The second and third step can be done separately or together: weigh out the pros and cons of the gamble you’re considering and pinpoint the actions you can take to mitigate loss and to find success in the venture.

Defining acceptable risk in small business is tricky, because every choice seems risky and typically the room for mistakes is small. Large corporations typically have the capital to back up choices that shake a company’s foundation. Small business owners, while they aren’t necessarily on the brink of bankruptcy, their capital is usually saved as backup to the company as it already stands. Small businesses save for the possibility of hardships to come. The state of the economy can have an immediate impact on it; their ability to employ people, their ability to purchase and maintain inventory, fuel costs… So, acceptable risk in small business boils down to this… how much do you believe in what you are about to do and how hard are you willing to work to keep and preserve what you have already built.

Weighing out risk in a business venture can be done in all sorts of ways: 1) you have your list of pros and cons; simple and straight forward, or 2) the risk cube that identifies how risky the venture you’re about to undertake really is, or 3) a spreadsheet that you can construct visually so that you determine what risks are involved, what actions are necessary to minimize loss or increase success, then a column for dividends, or benefits so that you can measure the benefits directly against the risk. Sometimes it’s easier to write it down and see it in front of you versus only thinking the gamble through. Referencing back to part one of this article, I talked about the irrigation company owner hiring a new man to run the services end of his business. When the company owner sat down to look at the risks involved in this choice, he might have used or defined the risk in these ways.

The risks cube method (diagram 1). The business owner hires the new employee to oversee his services department. This means that there will be a change in company processes, an increase in financial overhead, and a potential for employee dissension. The risk involved starting on day one is very high, thus the “A” situated in the red on the cube. However, the company owner forecasts to a year ahead (“B”) and considers the following; while overhead has increased in the form of payroll, insurances, and liability, the return from the venture has doubled in the form of sales and the rate the company is able to service their clients. While some employee dissension occurred, the nature of the new hire overseeing the services department has actually increased company morale. Employees that disagreed with the new direction the company has taken have left their positions and were replaced with new hires.

Diagram 1

Another way to assess risk is to create a spreadsheet (diagram 2) that details each risk and the measures the irrigation company owner will take to reduce losses, and increase the rate for success.

Diagram 2

There isn’t a right or wrong way to approach assessing risk. Each company has a different threshold for change and every company owner has a different viewpoint on how much risk should be applied in business. Personally, I feel that risk is necessary in business. A company owner has to be willing to push himself beyond their comfort level for the betterment of his company and the people he employs. Risk requires planning, commitment, and perseverance. Per the Proverbs of King Solomon,

Any enterprise is built by wise planning, becomes strong through common sense, and profits wonderfully by keeping abreast of the facts.
small business