Here’s how you can practice risk averse decision making to improve the odds of your business succeeding.
Starting your own business is not without risk, which is why so many people who think about starting a business don’t. They are afraid it’s too risky.
Even established business owners fear growing beyond their current capacities or adopting new but expensive technologies. The risk of not doing so is stagnation that leaves you vulnerable to more aggressive competitors that take the risks you didn’t.
There are ways to minimize and manage risk to make even the most risk-averse business owner comfortable with taking some chances.
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Calculate the Risk You’re Taking
Don’t commit to anything without analyzing all the angles. Get other perspectives from business owners who have been where you are. Weigh the pros and cons of any undertaking and develop both best case and worst case outcome scenarios.
As Small Biz Ahead notes, a completely considered and objective view provides the basis of a rational plan for action. Acting on a whim or a hunch with fingers crossed sometimes works, but more often than not it doesn’t. There’s a difference between taking a measured risk and driving off a cliff hoping that there isn’t that much of a fall to the ground.
Establish Goals Before Taking a Risk
Establish reasonable goals with equally reasonable timelines for achieving them. Concentrate on achieving one thing before moving on to another—accomplishing one goal should serve as the springboard to the next.
For example, you don’t need to expand your factory facilities until you’ve generated sufficient sales to justify the expense of new equipment and plant expansion. So put your money into sales training and product development first. If demand exceeds your production capabilities, look to outsource manufacturing first, then determine if the increased demand is a one-time spurt or a long-term trend.
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Don’t Spend More Money Than You Need To
Consider the careful and conservative approach of Julie Deane, founder of the Cambridge Satchel Company. According to Fast Company, her company now employs 120 people selling products in 120 countries and generates $21 million a year. In 2011, Deane was running the company out of her kitchen. She outsourced manufacturing, handled her own marketing and built the company’s e-commerce site using a basic web-building program.
In 2011, Deane was running the company out of her kitchen. She outsourced manufacturing, handled her own marketing and built the company’s e-commerce site using a basic web-building program.
Image via Fast Company
Only when orders far exceeded the capacity of her one contract manufacturer did Deane decide the time was right to invest in her own plant. Even then, she opted to lease old machinery that got the job done rather than buy new equip. As the Small Business Chronicle advises, keep outstanding loans and financing needs to a minimum. Grow at a rate you can finance internally. If financing becomes necessary, opt for long-term, fixed-rate loans over shorter credit lines that usually carry higher interest rates and monthly payments.
How Much Money Do You Need For Expansion?
Deane says that most of her decisions were guided by what was best for her and her company, not about making big profits in the short term. This was one reason why she resisted overtures from venture capitalists. She could do this because the business itself generated sufficient revenues to pay her employees and herself, as well as fund careful expansion.
Indeed, the reason she ultimately accepted a $21 million investment from a VC firm was less about the money than the need to tap into the expertise of the partners. The business was growing to the point where it was no longer possible to manage as a bootstrap organization.
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Build Infrastructure to Support Future Expansion
Plan ahead. Building your infrastructure is more than adding physical space, equipment and staff. It’s also having an operational infrastructure, the systems that make everything run. That means work processes, quality standards, performance measurements, skill needs, IT support, training and development. There’s little point in acquiring new equipment if you haven’t planned to attract staff that is trained in how to operate it safely, efficiently and productively. Learning while you go along tends to result in a longer learning curve that increases risk.
Small Town Marketing notes that, “Over 95 percent of franchises will be still be running five years after start-up, while only 15 percent of traditional businesses will still be trading.” Why? Because franchises follow strict guidelines on how to run the business, covering everything from product presentation to operational manuals to organization charts and budgets. Anticipating everything you need to run a business or expansion lowers risk and increases the chances of success.
Learn From Your Mistakes and Move On
Nothing in business, or life, is foolproof. It’s natural to be afraid of making the wrong decision. And sometimes you are going to make the wrong decision. The trick is to learn from what went wrong, correct it quickly and move forward. As entrepreneur Janis Pettit says, “If you always do what you always did, you’ll always get what you always got.”