If you want to earn money but take no risks, open a high-interest savings account because business is fraught with risk. Anyone starting a company, expanding one, innovating for new markets or doing any other kind of business needs to be someone willing to stand toe to toe with risk. Examples of risk in business can include everyday small risks or can be all-or-nothing enormous gambles, but as the saying goes, "without risk, there can be no reward."
The internet will give you dozens of kinds of risks depending on who’s doing the talking. A Wall Street guy will tell you all about operational, compliance, reputational and strategic risks, whereas an insurance broker will tell you about risks concerning liability, property, cybersecurity and legal and business interruption scenarios.
There are so many risks, and they vary tremendously depending on what kind of business you’re talking about, what size the company is and where it operates. A Boston shipping company opting to open a satellite location on the Black Sea in Bulgaria is taking risks with which few other Massachusetts companies will be familiar – the risks of operating in a region with high organized crime and dealing with corrupt officials.
A company can take risks by gambling on new laws that may or may not allow for a specific expansion or maybe building a warehouse in a region prone to hurricane damage. Perhaps they plan on spending a ton on unproven new technologies that will change the way their business happens. Great businesspeople take calculated risks all the time, and it's why they can be so hard to beat.
- Financial risk: Taking on a loan to secure a new phase of development means betting on higher profits that will allow paying down the line of credit on a fixed timeline.
- Strategic risk: Say there’s a taco shop that has subpar tacos but gets a lot of foot traffic and does well. A strategic risk would be to open a competing taco shop directly across the street, knowing the product is far superior and competitively priced. There’s already built-in location traffic looking for the same product, so why shouldn’t a similarly priced but better taco do well? It’s a risky move but a bold one, and it could pay off huge rather than starting in a new location without a taco heritage upon which to build.
- Reputational risk: Companies can build their reputation over years, so it’s a big roll of the dice if they do something to challenge that reputation. The Charmin toilet paper company, for instance, took a chance in 2014 when they opted to use “potty humor” for an advertising campaign. Jingles like “you’re my number one when I go number two” became a hit and got the company a legion of social media traction. It was all a risk in an era when being inappropriate can get brands in hot water.
Risk management is a skill in which any great business owner should be proficient. One of the tools used by CEOs and managers is that of a risk register. It’s effectively a list of risks being taken and possible outcomes that could occur, with a plan for how to respond to specific outcomes.
A commercial risk register example might be that a company decides it’s time to expand its operations and take on a new warehouse space. The risk may be that it takes on too much space, and the noted solution to this risk could be that it only uses half the space for the time being and does a temporary subleasing of the other half for a company that needs additional space for a limited time.