How to Assess the Risks of a New Business
By definition, an entrepreneur is a person who is willing to take risks in lieu of a profit. Therefore, acknowledging and embracing risk is a fundamental aspect of starting a new business. There will always be a certain level of uncertainty that you will have to prepare for and deal with when you work on establishing a startup business.
The temptation is to ignore these risks and move forward with a false sense of security mingled with irrational ambition. Such an approach will lead to inevitable failure. Once you enter the world of business, you put your name in an intense competition that will either get the best out of you or bring you crashing down. Therefore, you do not have the luxury to believe for a second that you are immune to financial danger. There are going to be plenty of ups and downs for a startup business. The smart thing to do is anticipate the failure before it arrives. This is what gives rise to the concept of risk assessment.
The reason why you would want to assess the risks of your new business is because you want to learn how to manage them. Risk assessment is a prerequisite to risk management. Risk management involves the ability to predict risks, identify risks and develop strategies to effectively counter these risks that threaten the success or survival of your business. The risk management plan is an integral part of any startup business plan. Understanding the potential risks of your business and figuring out ways in which you can reduce the impact of these risks is essential to maximizing your chances of succeeding in the world of business.
Identifying Major Risks
It is not humanly possible for an entrepreneur to list down all the risks that the business can encounter within the first few years. What the entrepreneur needs to do is identify some of the major risks that are likely to impact the startup. This requires the entrepreneur to research the industry and study risk patterns. In other, you need to learn from the mistakes of the businesses that you will be competing with soon.
There are many different types of major risks that you can possibly identify and these vary based on the nature of your business. For example, if you are starting a new business in the clothing industry, then your risks are going to be much different from that of an automobile business. That being said, there are some common major risks that can be associated with most types of new businesses. Here is a list of them along with brief descriptions:
1) Financial Risks
These cover both external and internal risks. External risks include changes in the interest rates or commodity prices. Internal rates on the other hand can be described as cash flow shortages, depreciation of assets and customers defaulting on payments without prior notice.
2) Legal Risks
A breach in the contract is the perfect example of a legal risk. Your business could also be in trouble for non-compliance with regulations imposed by the industry authorities. For example, there are plenty of businesses in the construction sector that are fined heavily for not maintaining onsite health and safety standards.
3) Operational Risks and/or Environmental Risks
If your key employee fails to show up to work for a month because of a serious illness, then your new business is going to be in hot water. This is a very simple example of an operational risk. Things could get even worse when there is an equipment breakdown or software failure. Imagine the kind of risk that your business would suffer if your inventor was wiped out by a natural disaster. All of these mishaps fall under the umbrella of operational risks.
4) Strategic Risks
This one is slightly more complicated than the others. A strategic risk is something you face when your business fails to adapt to changes in the market or the industry. For example, companies can go out of business if they are unable to respond to fluctuations in customer demand, innovation of superior technology or an overall increase in competition. Sometimes, companies fail simply because they are too short sighted to chase fresh business opportunities.
Risk identification is only the first step to risk assessment. You need to analyze the severity of each risk to fully understand the kind of issues that you may have to deal with in the future. The simplest and most effective way of evaluating a risk is to scale the risk on the basis of the following two criteria:
a) The Chances of the Risk Occurring
b) The Major Consequences of the Risk
By grading your risks, you will be able to prioritize the ones that are a bigger threat to your business. Risks do not affect businesses one at a time. They are likely to attack you in combinations. As your new business grows and evolves, you will have to learn to deal with these combinations by employing effective strategies at the right time. Your risk assessment should serve as a platform for devising your risk management strategies.
Leslie works at Cube Online Marketing, a digital marketing company he founded in 2007.