Risk is an inherent part of business. Just the simple act of owning a business is taking a risk. However, the more successful your business grows, the less likely you are to take additional risks. As the saying goes, “when you have nothing, you have nothing left to lose,” but the inverse of that is, of course, that when you have something, you’re not as willing to gamble with it.
While some restraint is important, every successful business owner knows that growing your business requires taking calculated financial risks. Always taking the “safe” route might feel more comfortable and reduce major losses, but it’s also unlikely to lead to any substantial growth. So how do you get out of “safety mode” and take more risks to earn greater returns?
Understand Good and Bad Risk
If you were to go skydiving, you would take every possible precaution before jumping from the plane. You want to be sure that competent professionals are flying the plane, maintaining the equipment, and supervising your jump. You’ll want to know that the parachute works, and that you will be safe during the entire journey. In other words, you probably wouldn’t go skydiving alone, using your buddy’s old parachute that he found in the attic, without someone to show you what you are doing.
Taking financial risks with your business is a lot like skydiving. With the right equipment and training, it’s perfectly safe, and can actually be enjoyable. When you make poor choices — like using a moth-eaten parachute — the consequences can be devastating. You have to learn, then, which risks are worthwhile, and which should be avoided.
For example, borrowing money for your business before you need it might appear to be a good planning strategy, but is actually dangerous, since you may be taking on more debt than is reasonable. Likewise, hiring people that you can’t really afford to pay, but who may bring value to your company down the road, is not a good risk either, since your overhead costs will increase without immediate ROI — and you may never see a return on those hires.
In short, a good risk is one in which you completely understand the risk factors, know the frequency and severity of bad outcomes, and where the potential reward outweighs the risk — and if the risk doesn’t pay off, you can withstand the losses. A bad risk is one in which the reward is not in line with the level of risk, the outcome is potentially catastrophic, and more often than not, the outcome is bad.
Get Information From Trusted Sources
We all know someone who is full of “can’t lose” ideas, or spews information they got from who-knows-where, which usually turns out to be wrong. It’s easy to ignore those people.
Those who are harder to ignore are the ones who seem to know what they are talking about, or who have experience. The problem is, even people who have taken risks that paid off may not be the best sources of information.
When contemplating a risky financial move, you have to do your own homework and seek information from trusted sources. For example, listen to talks by someone like Douglas Holz Eakin, the former director of the Congressional Budget Office, to learn more about potential policy changes that could impact your industry and how to mitigate risks, and read about how companies similar to yours handled comparable situations. The most important thing is to turn to trusted sources, and never make snap decisions.
Construct a Safety Net
Just like you wouldn’t jump from a plane without a parachute, you wouldn’t take financial risks without a safety net. When you analyze the potential outcomes of your risk, look at all of the aspects, both positive and negative. What is the worst case scenario? Can your business withstand that outcome? Only risk what your safety net can withstand, and do not take major risks until you have one in place. In addition, many experts recommend developing multiple income streams for your business, which allows you to take risks in one area while still staying afloat with funds from other areas.
Get Comfortable With Failure
Finally, there is no such thing as “zero risk.” Failure is always a possibility, and you need to get comfortable with the idea that things may not work out as you hoped. Even when you do your homework, have a safety net, and know that the risk is worthwhile, there is always the possibility of failure. You need to accept that, and understand that with failure comes lessons and opportunity — and that what seems like a colossal failure now is just a part of doing business, and that you can bounce back if you have the groundwork in place beforehand.