Risk Taking in Business
How to Take Calculated Risks
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How to think about risk taking in business and make wise decisions
Business is about taking calculated risks and there are limits to how much you can afford to lose. Are you a risk-taker or risk-averse? We are all different, and better understanding risk taking in business depending on your own situation, can improve your results and give you peace of mind. Taking calculated risks means the right level of risk and a balance between the loses and gains.
In this article I will cover the four areas to consider when evaluating how much risk you can take in your business ventures. I hope this helps you decide what’s the right level of risk for you and be more comfortable making decisions. The four areas to analyse are:
- Horizon
- Your personal situation
- People impacted
- Your personality
There are different approaches to risk taking in business. How much risk you should or are willing to take is a very individual thing. So it’s good to take a moment to understand your risk approach and your personal situation.
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4 Areas to Consider when Evaluating Business Risks
What successful people consider when taking risks in business
Horizon
Where do you want to be and when? How big is the gap between the desired place and where you are now? What does it take to get there?
If you are new to the industry, if you need a lot or resources and time, the risk is high. On the other hand, if you have experience in the industry or don’t need high investment capital, the risk is much lower.Your personal situation
The risk you take in business is closely related to the whole of your life. Your risk is relative, depending or your age, family status, other financial commitments, health etc. For instance, if you leave a job when you are 20, even if you fail, you still have a lot of time in your life to recover from the financial loss, you can find another job and so on. But if you are 50 and paying a mortgage or your kid’s education, you can’t afford to lose as much.
Risk is relative
People impacted
Can your decision impact your close ones? If the answer is yes, if the quality of their lives can change in case you fail, you need to ask their permission. One obvious negative outcome is getting into financial difficulties, but there are also others, sometimes overlooked, e.g. spending less time with your close ones or impacting them by being stressed. It’s different when you are single and want to re-mortgage your home to release capital for your business, and it’s different if your family lives with you.
Your personality
The level of risk you are able to handle depends on your personality type. Some people will be paralysed by too high risk, will underperform, won’t take good decisions or won’t move forward. So too much risk can freeze you. However, others thrive on risk and get excited about it. Anyhow, most of us work better when they are just a bit challenged and just a bit outside the comfort zone.
And finally, what do you consider risky? What will cause the greatest pain for you: financial or emotional loss, deterioration of health, relationship breakup? How would you feel losing it? The key is to understand what risk means to you.
Two common mistakes in thinking about risk
Taking example from others
While it’s great to have role models, you can’t copy everything and apply to your own circumstances. If you look at Elon Musk and think you could take the same risks, you may get in trouble if you don’t have the same assets, network and experience.
Burn the boat
You probably heard about the ‘burn the boat’ approach to risk taking in business. It may seem a good idea in a way that you don’t accept the scenario of failure. But if this is the only way to get yourself motivated to make it work, you probably don’t have enough motivation or aren’t working on a problem which is important enough. In such case, the costs are likely to outweigh the gains. Business is about taking calculated risks, not risking it all no matter what.
Summary
As an entrepreneur you need to consider what impact the risk and potential losses will have on the people around you, on your wellbeing, how much you can afford to lose and how quickly can you recover if you fail. Some people will risk everything they have to execute a business plan. But you need to decide what’s right for you in your circumstances.
After all, starting your own business is a risky business…
Next I will cover how to assess risk in business.