Risk. It is a word that carries a bunch of negative connotations. We avoid risk at all costs, right? Many times, if there is risk to be had in a decision, it ends up being a decision that isn’t made.
What we need to realize is that, just as in life, in business there will inevitably be risk.
Truth be told, pretty much every decision you make in your business has risk attached to it. So, how do we figure out what risk looks like in our business? And do we really want to avoid it? To be honest, you can’t completely avoid risk. Just isn’t going to happen.
What we can do is MITIGATE risk.
That’s just a fancy word for “reducing risk as much as we can within reason”. You can mitigate the living daylights out of risk, but at some point you are going to reach that familiar point of diminishing returns.
The biggest reason you can’t completely eliminate risk is there is almost always some cost, financial or opportunity, that comes with mitigating risk. Eventually, the cost of the risk mitigation is too high.
Let’s take a look at a couple examples of risks you might see in your business and how you might mitigate them.
Fire/Natural Disaster – If you have a physical location, there’s always the risk that it can burn to the ground, be flooded, or flattened in a tornado or hurricane. So, the risk mitigation here is easy, right? Insurance.
But, how much?
Well, here’s where the law of diminishing returns comes into play. You see, you could insure every last corner of your business. Insure the building, have an umbrella policy, business stoppage policy, flood insurance. I could go on, but I think you get the point.
Simple fact is, there are miniscule chances that alot of this is going to happen. So, you need to make a decision. What are the real chances that these calamities are going to happen?
Fire insurance? OK, probably pretty decent chance. Definitely want that. But, do you really need the added expense for flood insurance if the chances of catastrophic flooding in your area is 1,000,000 to 1? Yes, it can happen, but if you try to insure yourself against every possible bad thing, you’ll be broke in no time.
Customer credit – Here’s a dicey one. Many customers want credit. Yes, we commonly view credit as a loan or credit card. However, if you do something as simple as billing a customer after a job is complete, you are indeed extending them credit. Many times, we hold back the completed work until payment is received, but you have still already invested the time to complete it without any compensation from the customer.
There’s always a risk that the customer won’t pay you in an arrangement where you’ve extended credit. There’s a couple ways to mitigate risk here. One is to negotiate installment payments. Another is to assume some sort of delinquency rate when you do your planning and ensure you can absorb it.
Managing risk is one of the more important parts of planning in your business. Yes, things like marketing and product development are flashy and fun. It’s where the rubber hits the road.
However, if you don’t take a hard look at where the bad things can happen in your business, you could very well hit a bump in the road and be completely unprepared to deal with it.
Managing risk properly is a competitive advantage. Problems are going to show themselves over time. If you are better prepared than others in your marketplace to deal with it, that’s as good as any bit of advertising.