Managing risks as a start up
Starting and running a business certainty still has an appeal as more of us take the plunge and launch out into the business deep. The growing trend of business start-ups is evidenced in the sudden increase in the birth rate of businesses over the last 5 years, particularly in the larger cities. Perhaps its because of the seemed instability of the government or the fact that the term job for life is rarely used anymore, or maybe we all just want a better life and want to take control of our own destiny. Either way many of us are voting for financial freedom with our hands and feet by registering and then starting a business. If you are in the initial concept or start-up phase it can be very exciting and fun as the sense of hope for a brighter future begins to drive you as well as the knowledge of tremendous opportunity, (not just financial rewards but a chance to build something of substance) there must also be acknowledgement that starting a business comes with its fair share of risks....in fact i would even go as far to say the risks are even greater now than ever. How do i know? Well just as the birth rate of businesses has increased, the death rate is also on the rise)
For us to succeed we need to minimise the chance of failure as much as possible and this includes managing the risks that may impact us, if we can identify them early and take the right action, we have a chance to reduce their effectivity on our business
1) Identification of the risk is first and key...
Knowing what risks you may face is half the battle, because if you have knowledge about it you can potentially do something about it, even if it may occur anyway... but before I go any deeper lets determine what a risk is and why its so important to your business.
Whilst there are many definitions on risk in its simplistic of terms it is an instance or situation that if occurs can cause exposure to danger. Its not considered a positive because if it does occur it will have a negative impact. For example if i leave my house without my umbrella even though the forecast suggests there is a 90% chance of heavy showers, i am taking the risk of getting wet by not carrying my umbrella. So if your business has £1500 sales coming in this month and to date your expenses are £1300 and growing, there is risk that you will not be able to pay all your business expenses.
So step 1 is list all of the potential risks that you could be facing whilst starting up, this may take a while but think of all the eventualities that could take place? Depending on how long your list is you may want to categorize them based on their grouping e.g. you will have financial risks, market force risks, people/staff risks, personal risks etc whilst it is good to be comprehensive from the outset it is important to only note the risk of consequence
2) Constructing a list
Once you have your constructed your list, you will need to prioritize them in an order to help you determine which one to tackle and what order. To do this you will need to score each risk based on the level of impact it would have if it occurred and the likelihood of it happening. There are many different numbering systems, but for the sake of argument let’s use 1-25 with 1 being the lowest score and 25 being the highest with each score no higher than 5. Let’s look at an example
There is a risk your business won’t be able to provide you with an income for the first 6 months.. what impact would that have on you personally?. Let’s aim for a 3 (out of 5) and based on the accuracy of your plans, how likely is it to occur? Let’s go for a 4 (out of 5) therefore your risk score would be a 12 (out of 25) which was calculated 3x4=12
Now you have your score for each risk, for ease of management, we will categorise it further by RAG rating it, 0-8 is low (green ) 9 – 16 is medium (amber) and 17- 25 is high (red)
The 17-25 Red category must be tackled first as these have been identified as high risk and having the most impact on your business should the risk occur
3) Taking the right action
There are many different ways of tackling the risk you have identified, the action you choose will be dependent on the severity of the risk. When determining what action to take here are some options to consider
Do nothing – accept the risk. If you have scored the risk and determined it to have minimal impact or very unlikely to happen, you may want to accept it for example if I left my house without an umbrella with a high probability it was going to rain, but I knew I was in the car all day then it has minimum impact so I will accept the risk.
Provide a contingency - Providing a contingency is an alternative option should the risk occur. If I was planning to launch a product outside with a high probability of rain, a contingency would be to hire a nearby hall just in case it does rain
Mitigating the risk – A mitigation is another action you can do to reduce the impact of the risk e.g. using the risk that the business doesn’t make any money for 8 months which impacts you personally. You can mitigate against this by continuing to work or getting a part time job which reduces the impact or effectiveness of the overall risk.
Starting a business is a risk, and being honest one of the traits that most entrepreneurs’ share is they like taking risks, however your risk does not have to be reckless. By taking the time to manage the risk as best you can reduces the impact it has if it occurs.