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Originally Posted On: https://www.evolvetogrow.com.au/resources/how-do-you-know-when-to-take-risks-in-business/
How Do You Know When to Take Risks in Business?
The saying, ‘You win some, you lose some,’ sounds straightforward, but no one likes losing, especially when your business (and your reputation) is on the line. You might have your own voice of reason chattering away about playing it safe, but if not, you’re bound to have some well-meaning friend or family member sounding the alarm when you try to step off the well-trodden path.
How do business leaders tackle the emotion that comes with stepping off into the unknown?
Deciding when to take a risk in business is a critical judgment call that can change your company’s trajectory. Every opportunity you are presented with is a potential for gain BUT it comes with a spectrum of risks that require a measured approach.
Rather than just saying ‘no’ to everything, confident business leaders assess each situation by considering the direction of risk against their business objectives and the potential impact on the company’s operations and profitability.
What this gives them is risk criteria that shows the level and nature of risks that the business is willing or able to take. It’s not something you can pull out of a hat at the last minute though, it involves a comprehensive analysis of both the causes and impacts of potential risks. The process usually includes a risk assessment (where leaders evaluate the probability of certain events) as well as any possible effects it will have on the business, weighing these against the benefits of taking the risk.
To really handle risks well you have to be willing to give things a shove in the right direction. You want to factor in possible outcomes and do some work to tip the balance in your favour, then, if the perceived benefits outweigh the anticipated risks, you get the green light to proceed.
It’s not a path to be taken lightly, success in these decisions can lead to growth and give you a competitive advantage, but a misstep can result in setbacks or losses. To have a greater chance of being successful:
- Understand the risk you are dealing with
- Have the resources you need to manage what’s ahead
- Make sure every aspect of risk is calculated, not merely left to chance.
This blog will walk you through the strategies you need to take risks on confidently and professionally.
Understanding Risk in Small Business
I know you are probably thinking of big risks, but all small businesses face inherent risks that can affect their operations and financial well-being just about every day. Identifying and understanding these risks is the first step towards managing them effectively. Risks in small businesses can be broadly categorised into two fields: internal and external.
Internal risks include financial issues, personnel challenges, and operational hiccups. These are often within the business owner’s control. For instance, managing cash flow, training employees and employee satisfaction can minimise risks of insolvency, low productivity and high turnover rates.
External risks encompass economic fluctuations, legislative changes, and market competition. These factors are typically outside your direct control but can be softened with strategic planning. Staying on top of industry trends and regulatory shifts will help you to adapt quickly.
Below is a summary of the types of risks small business owners commonly face:
- Strategic Risks: Decisions that affect business direction
- Compliance Risks: The need to act in accordance with laws and regulations
- Financial Risks: Managing cash flow, cost, and other financial elements
- Operational Risks: Internal processes, people, and systems
- Market Risks: Competition and overall economic conditions
To give yourself the biggest advantage to front any type of risk you need to consider proactive risk management, which includes creating a risk management plan that addresses potential threats and outlines strategies to mitigate them. Small business owners can evaluate risks based on the likelihood of them occurring and the potential impact they might have. Rather than tackle every one, your focus needs to be on prioritising your resources. When you approach risk management thoughtfully it will support your business stability and growth.
Strategies for Risk Assessment
Knowing how to assess risk effectively in your business can help you to successfully navigate through future challenges. This section covers essential strategies within the risk evaluation process that cover both structured and analytical approaches.
Developing a Systematic Approach
A systematic approach is a consistent and logical sequence of actions for identifying and evaluating potential risks. Start by establishing clear risk criteria, which set standards to gauge the nature and level of risks a business could face.
For a small café, a systematic approach to assessing risk might involve identifying risks such as food spoilage and customer injury on the premises. An acceptable risk could be introducing a new menu item that might not sell as expected, considering the potential for innovation and customer satisfaction outweighs the cost of unsold inventory within calculated limits. An unacceptable risk would be ignoring health and safety standards, which could lead to foodborne illnesses and legal liabilities, severely impacting the café’s reputation and financial stability.
In contrast, an online retail business might assess risks like cybersecurity threats and supply chain disruptions. An acceptable risk could be experimenting with a new, unproven supplier for a minor part of the inventory to diversify products and possibly uncover cost efficiencies (with due diligence, obviously). However, failing to implement strong cybersecurity measures would be an unacceptable risk, as a data breach could compromise customer information, incur significant fines, and damage the business’s reputation irreparably.
These criteria help companies determine which risks are tolerable and which are not. It’s best to document this process – not just have it all in your head!- as consistency is central to making this work, and it also allows for transparency and reproducibility when assessing risks.
- Risk Identification: This initial step requires assembling a list of possible risks that could impact the business. Risks range from financial, operational, and strategic, to compliance-related and beyond.
- Risk Analysis: Risks are then analysed to evaluate their potential impact and likelihood. This can be achieved through qualitative or quantitative measures, or a combination of both.
Conducting Risk Analysis
Risk analysis is a detailed look at the identified risks to understand their magnitude and how likely they are to occur. There are two primary methods for conducting risk analysis:
- Qualitative Analysis: This is a non-numerical data assessment based on insights. Usually, these are categorised based on the severity and impact into ‘low’, ‘medium’, or ‘high’.
- Quantitative Analysis: This is numbers-driven, taking in numerical data, statistical models, and simulations to estimate risk levels and their potential impact on your business objectives. It provides a more measurable and objective view of risks, which can be particularly beneficial for financial decisions, but is not always accessible.
You can choose either method but in all honesty, getting as much data as you can to assess both angles of your risks provides a foundation for making informed decisions that gives you the best shot of opening doors to potential opportunities.
The Importance of Diverse Perspectives
The best way to understand your business risks is to look at it from as many angles as possible. That can mean getting out of your own head for a minute and consulting with other business owners, mentors or experienced coaches who can give you that 360-degree perspective that will prevent you from being blindsided.
Diverse insights shed light on different aspects of business challenges, both actual and potential, equipping business leaders with the breadth of information required to make informed decisions.
Deploying tools like SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is a great way to systematically capture different viewpoints.
Accepting Diversity as a Business Leader
As a business leader, you need to embrace and nurture diverse thoughts as they directly relate to risk management. An inclusive approach to risk management will help you address fairness and continuity concerns, and support a healthy response to a wide variety of potential threats.
To accept and grow diversity in your business:
Reach out. Incorporating a wide set of feedback is perfect for identifying risks that may not be immediately apparent to those in the CEO chair. Employees from diverse backgrounds can offer fresh ideas and point out red flags you might have overlooked.
Giving consideration to other opinions can result in a more resilient and innovative business structure.
Have an open-door policy. A workplace culture that encourages inclusivity allows your team to voice their opinions without fear of rejection. This culture also helps recognise quiet contributors from team members who might otherwise remain unheard.
Stay open-minded: Embracing diversity includes giving weight to opposing views, enhancing deliberation and reducing the risks of uniform thinking.
Risk Analysis and Contingency Planning
So that brings us to the important information. When do you need to take risks in your business?
Knowing when to take risks involves careful analysis and preparation for possible future events to put you in the best possible position to respond to threats and make the most of new opportunities.
Risk can lead to opportunity when businesses are prepared to assess and act upon the potential before them.
Taking risks in your small business is generally advisable when:
You’ve Done Your Homework: After thorough research and understanding the potential outcomes, taking calculated risks can lead to growth. This includes understanding your market, customer needs, and the competitive landscape.
Financial Stability: When your business is financially stable enough to absorb potential losses without jeopardising its survival. This doesn’t mean you need to be highly profitable, but you should have a safety net.
Opportunity for Significant Growth: If a risk presents an opportunity for significant growth or competitive advantage, it might be worth taking. This could be entering a new market, launching a new product, or adopting new technology.
Innovative Edge: To stay ahead in competitive industries, sometimes taking risks by innovating or adopting new technologies before your competitors do can establish your business as a market leader.
Recovery Plan is in Place: You have a solid plan to recover from potential negative outcomes. Knowing how to mitigate a failed risk can make taking the leap more palatable.
Feedback and Data Support the Decision: When customer feedback or data analysis suggests that a change in your business (like introducing a new product or service) could meet an unfulfilled need or significantly enhance satisfaction.
Legal and Ethical Compliance: The risk should not compromise legal standards or ethical considerations. Risks that could damage your reputation or lead to legal issues are not worth taking.
When You Can Learn from the Outcome: Even if the risk doesn’t pay off as expected, it should offer valuable insights or lessons that can help refine future strategies or innovations.
Remember, while taking risks can lead to growth and new opportunities, it’s crucial to balance them with solid business practices and not jeopardise your core operations or values.
Warning Signs in Risk Management
Recognising the early warning signs of potential problems will help you step up quickly to limit any damage. Have a map of where you can expect to see issues and watch for red flags. A little bit of disruption is expected when you make a change but keep a close eye on things to make sure you are also moving towards your overall goal.
- Changes in the Market: Fluctuations in market trends and consumer behaviours can indicate risks to business revenue and growth opportunities. Monitoring industry reports and market analysis helps identify these shifts.
- Legislative Changes: New laws or regulatory amendments can impact business processes. Stay informed about legislative developments to manage compliance risks.
- Financial Instabilities: Sudden changes in cash flow, increasing debt, or unexplained variances in financial statements may point out underlying financial risks.
- Operational Disruptions: Frequent breakdowns, supply chain issues, or IT system failures suggest operational risks that may affect business continuity.
- Employee Turnover: High staff turnover could reflect issues with workplace culture or job satisfaction, creating risks in human resources and productivity.
- Work Health and Safety (WHS) Issues: An increase in workplace accidents or near-misses, or failure to control identified hazards, points to significant risks in safety management.
- Reputation Fluctuations: Negative customer feedback, social media trends, or bad press can be early signs of reputational risk.
Maintaining Business Resilience
In any business, the capacity to withstand risk, adapt to change and face unexpected challenges comes down to resilience. No matter how carefully you tip-toe around risk, your business trajectory is never going to be all smooth sailing and happy profits. At some point, you and your business are going to be tested. Your ability to stay calm, see clearly and recover promptly from disruptions is what is going to give you the strength to maintain continuous business operations and thrive. Taking measured risks is great practice for being in the hot seat and reinforcing resilience.
Risk Awareness: A key to resilience is understanding potential risks. Businesses that actively conduct risk assessments and monitor market trends are better equipped to respond to adverse events.
How do you know when to take risk in business – FAQs
How do you determine business risk?
Determining business risk involves assessing potential uncertainties that could impact your company’s objectives, operations, or financial performance. This assessment considers various factors, including market conditions, competition, regulatory changes, financial stability, and management capabilities. By identifying and understanding these risks, businesses can develop strategies to mitigate their impact and capitalise on opportunities.
How do you identify and measure risk?
Identifying and measuring risk requires a systematic approach that considers both qualitative and quantitative factors. This involves conducting a thorough risk assessment, which includes analysing market trends, assessing potential threats, and evaluating the likelihood and impact of various scenarios. Techniques such as probability analysis, sensitivity analysis, and risk matrices are used to quantify the potential consequences of risks and prioritise them based on their severity.
How do you evaluate business risk?
Evaluating business risk involves assessing the overall impact of potential risks on the company’s objectives and operations. This evaluation considers factors such as the likelihood of risks occurring, their potential impact on financial performance, reputation, and market position, as well as the organisation’s ability to mitigate or manage them effectively. By weighing these factors, businesses can make informed decisions about whether to accept, transfer, mitigate, or avoid specific risks.
Why should you take risks?
Taking risks is essential for business growth and innovation. It allows companies to seize opportunities, adapt to changing market conditions, and stay competitive. By taking calculated risks, businesses can explore new markets, develop innovative products or services, and expand their customer base. Risk-taking fosters creativity, encourages entrepreneurial spirit, and can lead to long-term success and profitability.
What factors are used to evaluate risk?
Several factors are used to evaluate risk, including:
Probability: Assessing the likelihood of specific risks occurring.
Impact: Understanding the potential consequences of risks on financial performance, operations, and reputation.
Volatility: Considering the degree of uncertainty and variability in the market or industry.
Market dynamics: Analysing market trends, competition, and regulatory changes.
Financial stability: Evaluating the company’s financial health and ability to withstand adverse events.
Operational factors: Examining internal processes, resources, and capabilities.
Risk tolerance: Understanding the organisation’s willingness and capacity to accept and manage risk effectively.
Risk in Business: Final Thoughts
Taking a leap into the unknown and embracing risk can be a good thing for your businesses. When business owners are able to step out of their comfort zone, they open doors to new opportunities and adventures that provide growth in all sorts of directions. This could mean launching a new product, trying out a fresh marketing strategy, or even exploring a market nobody has dared to touch.
Taking calculated risks is essential for growth, innovation, and staying competitive in the market.
Of course, it’s all about balancing on the tightrope wisely. It means doing your homework, knowing when to take that leap, and having a safety net (a.k.a. a smart plan) in place. While it might feel a bit scary at times, you don’t have to do it alone. Our team have been working with business owners for decades. We have seen it all. We can help you find the hidden potential and opportunities for growth and mitigate the risks through strategies and plans that allow you to open the door to significant rewards. A sprinkle of well-thought-out risk can be just what your small business needs to grow and shine for those ready to embrace it with open arms.
If you would like some help with analysing what risks are worth taking, and which ones should be avoided, book a free strategy call today.
