Any financial planner worth his or her weight will assess their clients “risk” tolerance. The truth is that risk tolerance is a variable based upon experience. If you have never done anything before or have limited experience, your risk tolerance may be lower because you may not understand it. You may avoid certain things because you have experienced it and never want to again. Investing in a business venture may seem simple and your acceptance of whatever happens may not be much of a risk. However, trying the new Sushi restaurant on the corner may cause you to panic due to the fear of the unknown.
The point is risk is subjective and personal. That is why when you talk about taking risks in business, you have to have perspective. What is the riskiest thing you have done in your business? Why did you take that risk? After you took it, how did you feel? Notice, I am not asking if it paid off or not. I am asking you about your reaction to it. How do you assess risk?
Risk is about the reward and the penalty
There are several things I would never do (and by never, I mean never) voluntarily. Jumping out of an airplane, bungee jumping, scaffolding. I mean, if my life depended on it, I may just decide that my life up until that point has been amazing and it is just time to go. I think about the penalty and it is not worth it to me. Regardless of the reward.
There are some who only think about the reward when it comes to the risks. I have had clients who made decisions which I thought were insane, based upon the possibility of everything going right. They don’t consider the negative effects at all. I had one client who made the decision to take out several loans to maintain the operations of the business. My client felt that it would be better to use someone else’s money to fund this portion of the business. It worked well for a while until the business encountered some compliance issues which affected its income. Since the business had obtained significant debt, any change in the cash flow of the business greatly affected the stability of the business. Ultimately the business became embroiled in several lawsuits.
My client felt it was worth it because the business would have never gotten as far as it did without the loans. Despite the current problems, the risk was worth it. My client made the point of saying he would do it again. While it made my stomach hurt to hear that, I understood the point. He knew what could happen, next time he would take better precautions to prevent the same problems from occurring. For him, the reward greatly outweighed the penalty.
Risk isn’t about flowing with the wind.
It is easy to assume that risky people just go with the flow. As stated earlier, you understand the reward and the penalty and you make decisions accordingly. That means you do your research. Some risks are more easily defined than others. Apple’s risky iPhone gave people something they didn’t even know they wanted. That is harder to assess. Most of your business decisions will not be on that scale.
If you are only considering the great things that can happen, you are doing yourself and your business a disservice. Gut reactions are good, but you should also check it with research. Make a credible determination of what can happen, whether it is good or bad. What does that mean? Do your homework.
Are you hiring a new consultant for your business? Don’t just look at the cost (yes, that is important), also consider the long term benefits of having help. Maybe it cannot be monitored in terms of dollar and cents. Maybe it is monitored in terms of dollars and peace of mind. Whatever the risk and whatever the reward, assesses and make a determination about what is best for you and your business.
A business that takes no risks is doomed to mediocrity.
As I stated before, risk is relative. Depending upon your experience dipping your toe in the water could be a risk. The more experienced you become, the further out in the water you will be willing to go. The further you go in the water, the riskier it becomes. When you first start a venture it is easy to take small risks. But the longer you are in business, you will find that some risks are not actually risks. They are just a part of business. Your tolerance for risk changes and you are more willing to dive in head first.
You should always test your ability to take risks. As a business owner, you should encourage yourself, your employees and advisors to push forward. Without doing so, you will become mediocre. Mediocrity is worse than failure. That means your business is no different from every other one that exists. If you are not different, why are you in business?
Shahara Wright is an experienced and highly sought after business law attorney and business strategist. She is the author of From Entrepreneur to CEO and host of the CEO Collaboration Circle. Shahara founded The CEO Effect, LLC to work with small business owners who want to implement strategy to build capacity.
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