- June 15, 2020
- Posted by: dawgenglobal
- Categories: Accounting and Consulting Firms, Advisory
A business owner is thoroughly responsible for their own financial survival and possibly the financial survival of their employees. Business owners, for the most part, seem to be “risk takers”, who really don’t easily “go with the flow”. They are inventive and somewhat confident, as just having their own business does mandate that they possess these qualities.
However, the ability to live with risk is very much a personal issue. Some business owners can live with more risk than others and some can manage the risk better than others.
Having the ability to effectively manage risk is imperative for a successful business venture. Therefore business owners need to be able to effectively judge how much risk is “acceptable” and which business ventures are inherently “too risky” and therefore perhaps harmful to the business overall.
While all businesses must grow and change continually in order to survive, every time a business makes a decision to expand or increase its offerings, a modicum of risk does exist. Most businesses face risks when they incorporate new offerings into their current ones, take on new employees, when they change their marketing techniques sufficiently, or when they expand into new areas of business above and beyond the general core or “parent” business.
Each time a new project, venture or offering is added to a business, “risk containment” should be employed. It is never possible to eliminate all risks completely, but containing risks to an acceptable level will enhance the experience and keep the overall losses at an acceptable level, if failure of the new venture or offering does occur.
Business owners need to assess the risk using the following principles:
- Is this risk necessary for the further development of the business? If so, why?
- Is this risk attainable for the business? If so, why?
- Is this risk affordable for the business? If not, then it shouldn’t be done. A strict, realistic assessment of funds available and a budget should be worked out before a business embarks on any type of expansion or addition to its present offerings.
- Is the “timing” right for the new addition or venture? Many times, if a business is experiencing a downward cycle or other financially stressful barriers, expansions or additions are best left for another period in the life of a business.
Many business owners make one of two serious mistakes: they either refuse to gamble at all, and don’t therefore grow their business appropriately, or they gamble too much, exposing their business to such a high degree of risk that eventually the business finds itself in financial difficulties.
Example A: John has owned his own print shop for several decades, during which time he has enjoyed much success. The newest technologies, though, could increase John’s clientele and the speed at which he delivers his goods to existing clients. John, though, is thoroughly risk aversive, concerned about the expense of expenditures that would follow incorporation of the latest technologies, and therefore, John does not incorporate them. As a result, he has lost some existing clients and many times fails to add new ones, effectively hurting his bottom line.
Example B: Miriam owns her own real estate company and does very well with it, employing ten people. Miriam feels the need for new challenges however, and decides to buy several investment properties herself. The properties she buys are extremely expensive, and need much upkeep. In order to purchase them, Miriam borrows “against” her existing business, using that as collateral for the loans she must acquire. Within mere months, Miriam experiences several major repairs needed on each of the newly acquired buildings. She then must borrow yet again to afford these, and finds herself going deeper and deeper into debt. It becomes a struggle finally, to even “hold onto” the original business, as she now owes enormously to several creditors.
As you can see, John, is much too risk aversive, while Miriam failed to take into consideration the many difficulties that could occur with large-scale expansion of this sort. Neither is correct in their assessment or approach to risk management and each has hurt their own businesses as a result.
The old adage, “Slow but steady, wins the race” really applies significantly to business and appropriate risk management within a business. Business owners should plan thoroughly and weigh their risks completely before proceeding with any new venture or expansion. However, businesses also need “planned growth” throughout given periods.
Business owners need to use their judgment wisely at all times, and use it well, when considering appropriate risk management techniques.