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Ultimately, there is no way around risk when it comes to business. At its very core, business is uncertain. However, that isn’t to say there aren’t ways to reduce risk and improve your chances of success. In fact, your success as an entrepreneur or business owner will likely depend on your ability to reduce risk while simultaneously maximizing potential. It’s a fine line to walk but one that, when mastered, can leave you quite profitable.
Healthy vs. Unhealthy Risk
It’s worth noting that not all risk is created equal. In fact, every time you take a chance, the results rely on a number of independent circumstances that may or may not be unique to your situation. The key is to find situations and risks that limit potentially negative outcomes while maximizing the chance of positive results.
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The problem for many people is that they don’t realize there is a difference. This either causes them to make foolish decisions or scares them away altogether. According to Ben Michaelis, PhD, “The reason that people usually recoil at the idea of risk is that many of us are brought up in environments that avoid it.” He argues that the average family, school, community, or business is risk averse. In his opinion, this is the result of misunderstanding risk. Instead of recognizing a difference between healthy and unhealthy risk, they lump it all together and walk away.
Before you can learn how to reduce risk while maximizing potential, you must understand this fundamental idea. Only then is it possible to make smart, responsible, and fiscally sound choices.
Tips for Reducing Risk and Maximizing Potential
- Spend smart. According to Scott Lovingood, CEO of the Wealth Squad, Inc., “The number one risk for most small businesses is improper cash-flow management.” Reducing risk on this front requires careful budgeting and strict attention to detail. You should create a long-term contingency plan and set aside anywhere from three to six months of operating costs in a reserve stockpile. This ensures you are safe for a period of time if something goes wrong.
- Client diversification. While it is not possible in every business, you should attempt to diversify your client portfolio to include customers in multiple industries. This prevents your business from suffering if a specific industry collapses or loses its demand for the products and services you offer.
- Don’t be client dependent. Closely related to the previous tip is the idea of avoiding client dependence. This means never letting your business depend on a large percentage of its revenue coming from one client. If a key customer makes up 60 percent of your revenue, losing the contract could force your business to close. Work on developing an even client distribution to protect yourself against this risk.
- Protect key people. Does your business rely on specific people who are – in Lovingood’s words – “mission-critical to your business”? If so, one of the best ways to protect yourself from key staffers leaving, getting injured, or passing away is to buy a key-person insurance policy.
- Reassess your business plan. Your business goals and processes will likely change over time, so it’s necessary to reassess your business plan on a regular basis. This ensures the organization is moving in the right direction and can adapt to changes as necessary. Additionally, it maximizes your potential by making sure you’re taking advantage of new opportunities.
- Invest your returns. It’s almost always the companies that reinvest profits as opposed to cutting large paychecks that are successful in the long term. According to Jonathan Caplan of Fruitful Property Investments, “Investing always entails some level of risk, but I would argue that doing nothing is even riskier. You need to make your money work for you.”
- Keep fixed payments low. According to investing expert Joshua Kennon, it’s not the debt that hurts people; it’s their inability to make payments. In other words, you need to work within a system that allows you to make smaller payments when your cash flow is low and larger payments when it’s healthy. This requires low fixed payments so you can use your working capital to pay variable expenses.
- Get everything in writing. As a general rule, get everything you do in writing. Whether it’s a contact, notice, appeal, proposal, or anything else, put it in writing. This protects you in the long run and ensures any miscommunication doesn’t lead to trouble. However, coupled with this must be a commitment to honesty. Having things in writing only works if you follow through with what you say.
Walking the Line
Learning how to minimize risk while maximizing potential is something that takes years and decades of experience to perfect. Once you learn how to approach various business situations with confidence and preparedness, however, you will find it becomes easier and easier. Remember to start by assessing whether a risk is healthy or unhealthy, and proceed with the right amount of caution.
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About Drew Hendricks
I'm a tech, social media, and environmentalism addict. I've written for many large publishers such as National Geographic, Technorati, and The Huffington Post. I have also worked with a variety of startups around the globe as well as large advertising agencies in the United States and the U.K. I currently live in San Francisco, where I attend as many tech and business conferences as possible to gain knowledge and transfer it to others. In my free time you'll find me in a disc golf course or at the dog park with my dog Zeus.
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