Successful entrepreneurs share many of the same traits: they combine the right mix of hard work, grit, and passion with the necessary financial resources and a bit of luck. Above all, successful entrepreneurs embrace risk-taking.
Anyone who wants to start a business has to be willing to take risks. In fact, starting a business is a risky decision in itself. Consider this: according to the U.S. Bureau of Labor Statistics, almost 1 in 5 private businesses (18.4%) fail within the first year. The rate increases to nearly half (49.7%) after 5 years, and by year 10, nearly two-thirds (65.5%) of businesses will have failed.
These statistics should not discourage you if you’re planning on starting your own business. There are over 30 million small businesses in the US, and there’s no reason why yours can’t be among them. Rather, these numbers are a reminder that business owners can’t avoid taking on risks when running their businesses, and should instead embrace risk-taking.
In this article, we put the focus on risk management for small business enterprises. We will discuss what kind of risks small businesses face, and how owners can manage those risks. We will then look at why small businesses should take on more risks, and how they can do so responsibly to achieve long-term success.
What Makes Small Businesses Risky?
Small and medium-sized businesses face many of the same risks as large firms, but they often lack the financial and logistical resources of their larger counterparts. As a result, the biggest challenge for small businesses is managing the risks they face with the limited resources available to them.
The potential downside of risk-taking is greater for small businesses as well, because even a single mistake can cause financial and reputational losses that can destroy the entire business. Assessing and mitigating risks is therefore crucial for all small businesses.
There are two main types of risks that small businesses have to worry about: internal and external risks. Internal risks originate from within the business and are under the control of the business and its owner(s). Employment-related issues or lack of insurance, for example, can be the source of internal risks.
External risks are due to factors outside the control of the business. Anything from rising inflation and interest rates to competitor-related issues can be the cause of such external risks. Small businesses are often confronted with both internal and external issues at the same time, and have to devise strategies for mitigating both kinds of risks.
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Key Risk Factors for Small Businesses
There are several key risk factors, both internal and external, that affect all small businesses:
- Financial Risks: The most significant and consistent types of risks faced by small businesses are financial in nature. Many entrepreneurs and founders invest their own savings when starting their business, so that the stakes and potential losses are often deeply personal. Cash flow is a major source of concern when running the business, as owners have to find ways to finance their operations and pay their employees while looking to grow. That often means seeking outside sources of investment, some of which can be very risky. Economic downturns and recessions are the key external financial risk factors for small businesses, since many firms lack the means to sustain financial losses over an extended down period.
- Strategic Risks: For newer businesses, finding the right kind of strategy involves a great deal of trial and error. This is a risky but necessary part of growing the business. Once a strategy is in place, the challenge is to adjust and revise the strategy to keep up with changes in the economic, legal, and competitive landscape. Making those necessary adjustments requires a willingness to take on new, unexpected risks while keeping the business running.
- Competitive & Market Risks: All businesses have to provide services and products that can compete with those of other firms, whether large or small. Any changes in the market, whether through new competitors, market consolidation, or changing technology and trends, can seriously impact the revenue and profitability of a small business. The risk is especially high for startups and new businesses, as they have to compete against more established competitors with greater resources.
- Credibility & Reputation Risks: Establishing and maintaining the trust of consumers, clients, and vendors is of the utmost importance for all small businesses. On the other hand, losing that trust can cause serious damage to the business. A company’s reputation can be its greatest asset and biggest source of risk. Consider, for example, the impact of positive or negative reviews online, or the effect that a company’s social media presence can have on the success of its business. Establishing credibility and maintaining a good reputation are essential parts of risk management for any business.
- Business Interruption Risks: Risks arising from disruptions due to external factors are a constant concern for all businesses. From natural disasters to geo-political conflicts, many sources of disruption can negatively affect the day-to-day operations of a small business. The recent supply chain problems, for example, offer a glimpse of the risks that come with being part of the global distribution network of goods and services.
- Technology & Security Risks: The business community’s reliance on technology means that all businesses are also vulnerable to risks stemming from technological failures and security breaches. Cyber threats such as ransomware attacks are a serious and growing source of trouble for businesses that rely heavily on the Internet.
- Liability Risks: Small businesses are especially vulnerable to liability issues, both for reputational and financial reasons. A single lawsuit can permanently damage the reputation of a business and result in financial losses that could effectively lead to bankruptcy. Companies without the necessary insurance coverage leave themselves and their leaders exposed to serious risks.
Why Small Business Owners Need to be Risk-Takers
Given the many risk factors involved in running a business, why would anyone want to start their own company? Because entrepreneurs are risk-takers by their very nature.
Every aspect of starting a business involves taking on risks. Business owners encounter risks at every turn, from investing their personal savings, time, and effort into creating a new business, to offering consumers new services and products, to finding the right employees and partners. By embracing those risks, however, business owners create new opportunities for themselves that can allow them to stand out and succeed.
Entrepreneurs and small business owners share many similar characteristics:
- They are outsiders and non-conformists willing to leave conventional thinking behind and take a chance on new ideas.
- They are forward-looking and willing to imagine positive future outcomes and work towards them.
- They are problem solvers who invest time and energy into finding the right solutions.
- They are willing to trust others, and dedicate the time to build the right team around them to help their business succeed.
- They make personal sacrifices to build up their business by dedicating their personal time, energy, and money to achieve their goals.
It’s essential for business owners to know their risk profile so that they can approach business risk in a way that suits their style of leadership.
The Benefits of Taking on More Risks
Without risk-taking, no small business can achieve and maintain success over the long term. Understanding risk in terms of the promising rewards instead of the potential downsides is essential in embracing the benefits of risk-taking.
There are several important benefits that entrepreneurs should consider when taking on risks:
- Taking risks allows entrepreneurs to create new opportunities for themselves and their businesses. It can empower them to get ahead of the competition and attract new customers and clients.
- Entrepreneurs gain new skills and experiences when embracing risk, which can strengthen their self-confidence and empower them to lead their companies through challenging times.
- Risk-taking also has the advantage of removing barriers and obstacles that prevent a business from reaching its potential. Creating new products or entering new markets, for example, will always come with risks, but it can also transform a business and significantly improve its finances.
- For business owners, risk-taking is also a reflection of their strength of character: it signals to investors and clients that they are willing to do what it takes to realize their vision and achieve their goals. It can inspire employees to be more committed to the company’s vision and future.
- There are benefits to the failure of risk-taking as well. Entrepreneurs can learn important lessons about best practices when confronted with failure while taking risks. Those lessons can then strengthen their ability to face up to future challenges, making them more resilient.
Entrepreneurs and small business owners should take all these benefits into consideration when assessing the potential costs and downsides of risk-taking. It’s also important to consider the dangers of avoiding risks. Businesses that refuse to take risks can end up losing ground to their competitors, fall behind in innovation, and lose market share. Without continuous risk-taking, a business is doomed to failure.
How to Take on More Risks
The key challenge when taking on more risks is to avoid any unnecessary risks while embracing the kind of calculated risks that can benefit your business. There are several important steps businesses can take to handle risk-taking in a responsible way:
- Create a risk management plan: It is vital for all businesses to have a risk management plan. In that way, businesses can identify and analyze the risks they face, and form strategies for mitigating those risks. Once that is achieved, a business can initiate the process of taking on more risks.
- Have a risk assessment strategy: Before taking on any new risk, consider its potential benefits and downsides, and decide whether it will be worth it. You should take into account your current financial situation and any external factors that can influence the potential outcomes of any risky decisions you are planning to make.
- Look beyond your personal fears and doubts: When taking on new risks, approach the decision from a rational perspective, as part of your broader business strategy.
- Focus on the potential benefits: Looking at the bright side of risk-taking is a strategically necessary decision. It will help keep you focused on what’s needed to achieve the desired outcome.
- Monitor your progress: Assess the immediate results of your risk-taking and be willing to adjust your approach to mitigate the potential downsides and improve your chances of success. Keep in mind that external or internal changes will affect your ability to handle risk. Always have a set of goals in place to track your progress.
- Look for support from your team: Even sole business owners are in constant collaboration with their customers, business partners, relatives, and friends. You should be willing to seek support and advice from people you can trust. Don’t hesitate to look for advice from other business owners, entrepreneurs, and investors whose experiences with risk-taking can help strengthen your own risk-taking skills.
- Stay protected with the right insurance coverage: Assessing and limiting the potential liabilities that you and your business could face is essential to managing risk. Having a solid understanding of how small business insurance works is vital for any business owner looking to take on more risks. Without the right insurance policies, you could be faced with liabilities that could permanently damage the reputation and financial health of your company.
Taking Your Business to the Next Level
As a business owner, once you’ve made the decision to take a calculated risk, it’s important to stick with that decision and go through with it. Staying committed to your decision is an indicator of your trust in the decision-making process. That doesn’t mean that you can’t change your mind down the road or adjust your expectations in response to changing circumstances. Such adjustments are part of any responsible risk management strategy.
Rather, committing yourself to risk-taking can help you stay focused on realizing your vision and working towards the most optimistic outcome possible. All business owners are faced with challenges that require risk-taking on a daily basis. Entrepreneurs and small business owners have the added responsibility of taking on more risks to grow their businesses. By planning ahead, staying protected against potential liabilities, and keeping your focus on the benefits and rewards of risk-taking, you can take your business to the next level.