Some business experts believe that the reason why some businesses do not survive past 5 years can be linked to lack of proper risk management. In this article, I will be showing us how an entrepreneur can manage risk properly in a business that is yet in infancy.
1. Get to know more about the business
It is true that when you have a broad knowledge about a thing, the less mistake you make. Also, your broad knowledge on it reduces it's risk factor greatly. Most of the failed start-up businesses can be traced to lack of important knowledge needed for the business. The entrepreneur may know few things about the business in the beginning, but as he continues, he may encounter so many things he didn't expect and he ends up overwhelmed.
This is why it is advisable not to rush into a business, but to find someone already in the business that you can understudy. I remember when I had plans to enter into poultry, so I went online to get necessary information that I needed. In my mind, I had enough capital, all I needed was someone to lease me a land then I can begin effectively with the knowledge I obtained online.
One day, I was opportuned to discuss with a man who own a poultry down the street. I casually asked him how much I will need to feed around 250 layer chicks. He began to explain to me the cost, and the challenges I may face in the poultry business. He also suggested that I should get chickens that are about to start laying eggs than just chicks that are a month old, as they are prone to diseases and they may need to be vaccinated. Then, I never factored in thr cost for vaccine in my plan. From what he said, out of the 250, I may lose as much as 50 of them if there was a flu breakout. From what he explained, I knew that the budget I had in mind was too little to start up a poultry.
Imagine if I didn't get the chance to seek his knowledge about it, I might have lost all my investment and then I will be more frustrated than I was in the beginning. Now, with the knowledge I have, the next time I wish to venture into poultry, it will be less risky, and I won't make a lot of mistakes, because I'm well informed.
2. Prioritize your risks
Although it is true that with greater risk comes greater reward, it is worth adding that you can only obtain a reward if you survive the tribulations that comes with the risk. This is why it is not all risks that you should shoulder; don't let yourself be moved by greed of reward.
As a start-up entrepreneur, it is important to sit down first, list out the various risk you may likely face in your business, and the possible actions that you will take that will bring that risk; then before you take that action, ask your self if it worth the risk, or if you should avoid that risk totally for the moment.
There is a capacity every entrepreneur can carry, and that capacity is based on the level of knowledge and experience he/she has built over time. Carrying anything above your capacity is very risk, and it may not turn out profitably as you expect. For instance, giving a person who sells in a few things in a kiosk $1 million dollars to invest in his/her business is very risky. Although they may feel they can handle that amount, you will be surprised that within a year, in an unexplainable way, they will lose everything and return back to their previous level.
This is the reason why some start up businesses are in large debt; because they borrowed more than they can bear and expanded more rapidly than they should. Remember, not all risk are good for the business at every given moment. Learn to sieve through your options and take only calculated risks.
3. Proper financial management
This cannot be over emphasized. To survive the first five years of a business requires strong financial discipline. Ideally, a business man is not supposed to take out any profit he makes in his business all through the first year of the business. The reason is that, that money is not actually his profit as he is yet to recover the capital he invested into that business.
Depending on how much is invested in a business, it may take some time for the business man to take out some money from the business without shaking the business. Most times, it is impossible not to take out money from the business as that the only source of livelihood of the business man. So, what should he do?
This why financial records are very important. By keeping financial records he can keep himself from spending what will be detrimental to the growth of the business. Also, through his financial records, he can evaluate himself and his business to know his capacity, this way he can be able to decide how much risk he can successfully take without collapsing his business.