“Risk is the nature of true business growth.” – Wayne Barrow
Starting up your own business is always a welcomed idea. Entrepreneurship is a valuable asset to the Canadian economy. However, start-ups require taking up some level of risk in order to be successful especially when trying to break into a competitive industry. According to Statistic Brain (2016), 75% of all start-ups will have failed by the tenth year of operations.
Entrepreneurships fail because they are not risk-free. The target market may not large enough, the product may not sell, the price might be too high or too low, or products may not be promoted using the right medium – these are some of the many risks associated with starting a business. The flip side to the risk associated with start-ups is Opportunity. The greater the opportunity and reward expected to be derived, the greater the risk involved in starting the entrepreneurship. Entrepreneurs should note that even though all reward is a result of great risk, not all risks will result in rewards. In order to increase the likelihood of success and mitigate some of the risk associated with entrepreneurship, a thorough risk assessment and risk management strategy should be established. Risk assessment begins with understanding the various types of risks involved in starting a business and its effects on the organization’s goals.
What kind of risks might entrepreneurs have to deal with? There are various types of risks that entrepreneur has to consider including:
- Market Risk
- Compliance Risks
- Finance Risk
- Technology Risks
- Systemic Risks
- People Risk
When starting up a business, the entrepreneur needs to be aware of his/her risk tolerance level, and develop plans and contingencies for managing each risk factor. The entrepreneur needs to thoroughly assess the likelihood of the risk occurring, and its impact on short and long term objectives.
Risk: Likelihood and Impact
How does an entrepreneur identify the likelihood or impact of risk? The likelihood of risk is the probability and frequency that the risk will occur. For example, if you’re starting a business that involves a lot of online business to business (B-to-B) or business to customers (B-to-C) transactions, but you have no internet security setup, and your business website is not secured, the probability and frequency – that is the likelihood – of fraud or information risk occurring is high. The impact of risk, is the consequence and severity of the risk on the organization’s goals. The occurrence of fraud risk (theft of money) could have a devastating effect on an organization’s long term goals. For example, a business is only making profits of $40,000 each year and an employee has been misappropriating $10,000 worth of funds annually. That’s 40% of its profits being misused! Over time, if this pattern continues, it could lead to the business eventually declaring bankruptcy. In this scenario, fraud risk has a high impact on the company’s long term goals. Understanding the likelihood and impact of risk, determines the entrepreneur’s response to each risk factor.
There are generally four responses in managing risk – Accept the Risk, Ignore the Risk, Transfer the Risk, and Mitigate the Risk
Accepting the Risk – Accepting the risk involves developing contingency plans for when the risk does occur. Generally low-impact, low-likelihood risks may be “accepted”. For example, you have done your research, and believe there is a 95% chance that your product is needed by your target market. The likelihood that the product will not be needed is only 5%. As an entrepreneur, you may choose to accept this risk, and establish contingency plans such as developing new products, or targeting a new market group, should the product fail to sell.
Ignoring Risk – Ignoring the risk means that the entrepreneur has no contingency plans to deal with the risk, should it occur. Generally, low-likelihood risks with little or no impacts may be ignored. When risk is ignored, the entrepreneur is willing to bear the consequences of the risk.
Transferring the Risk – Sometimes the entrepreneur might choose to transfer the risk to other parties. This usually involves purchasing insurance/protection with a second party. Note however, that transferring the risk does not always mean the risk is completely eliminated, it only reduces the risk that the entrepreneur has to manage. For example, an entrepreneur realizes that 80% of machinery and equipment being used in production, will likely malfunction in the next year. He may opt for purchasing warranty or insurance with a second party. In the event that a malfunction does occur, the warranty with the second party will likely cover most of the costs, however the entrepreneur might also have to bear some of the repair costs.
Mitigating the Risk – When risk is mitigated, the impact and likelihood of the risk occurring is reduced.
With a thorough understanding of the likelihood, impact and response to risk, the entrepreneur should establish a proper risk management strategy. The basic steps for planning risk management strategies are as follows:
- Listing all risk factors – anything that could potentially affect the success of your business
- Assigning each risk factor to a type of risk, as discussed above
- Rating the likelihood of each risk factor occurring
- Listing the Impact and consequence of each risk factor occurring
- Listing the Risk Response to each risk factor
- Outline the implementation cost for each risk response above
- Deciding on which Risk Responses to implement based on a thorough analysis of the first six steps
Entrepreneurs should ensure that the most obvious risk factors are managed first. A proper risk management strategy could be the difference between a business that fails after its first year of operations, and one that continues to run beyond its tenth year of operations.
Hirai, A. What Kills Startups. Retrieved from https://www.caycon.com/what-kills-startups.php.
Bluemner, A. (2013, July 18). The Four Things Every Startups Should Know Before Selecting a Software Platform. Retrieved from http://findaccountingsoftware.com/expert-advice/the-four-things-every-start-up-should-know-about-selecting-software/
Statistic Brain (2016, January 4). Startup Business Failure Rate by Industry. Retrieved from http://www.statisticbrain.com/startup-failure-by-industry/