Implications of Business Risk
Owning and operating a small business is a risky way to make a living. You rarely know how much money you will earn day to day, and personal funds may be the only way to make up for shortfalls. Introducing new products and services necessarily entails investing in the unknown. Although this uncertainty can make a small business interesting and challenging, it is best to manage risk by carefully researching new ventures and understanding the variables you face when making changes.
There is no magic formula for determining how much business risk is acceptable; if there were such a yardstick, you would be dealing with certainties rather than risk. However, understanding your strengths and limitations helps when making choices about business endeavors. Choose new products and services that are compatible with existing offerings, so you can market them to your existing clientele and reach the target market you have already developed. Set a budget for each new endeavor so you have a clear idea at the outset of how much you are willing to lose if things don't work out.
Unacceptable risk usually involves prohibitive sums of money or ventures with the potential to cut into existing sales. If you cannot recoup your investment in a reasonable projected amount of time, then you are taking an unacceptable risk. You would be taking an unacceptable risk by expanding an existing restaurant with an addition that costs $100,000 to build but will only increase sales by $20,000 per year if the seats are consistently full. This investment would take too long to pay back, and its financially viability depends on a steady volume, which rarely occurs in the restaurant industry.
Managing business risk involves doing thorough research, setting a budget that is consistent with your level of skill and experience, and proactively monitoring feedback by tracking sales and customer responses. Test marketing a product before making a full-fledged investment can tell you whether there is sufficient demand to justify your expected outlay. Tailoring your budget to your expertise enables you to limit the amount of money you spend on ventures outside of your comfort zone.
Some entrepreneurs opt to minimize risk by resisting changes that require investments. A risk-averse entrepreneur might stick with an existing product line with steady sales rather than experimenting with new ventures. Although this approach may lessen the risk of losing a large sum of money on an uncertain venture, it involves its own type of risk. Customer tastes change, and many consumers enjoy variety. If you never change your offerings, you may lose existing customers interested in trying new options.