The only reason that any business exists is that someone, at some time, has decided that it is worth investing the time, graft and money to get the business off the ground. In other words, they have taken a calculated risk.
Starting a business is an exercise in risk management. Successful businesses are those that either got lucky or stacked the odds of success in their favour. Business owners that rely on luck and gut instinct may do well until something unexpected happens. In contrast, entrepreneurs who spend a bit of time thinking through these issues are much better prepared for the inevitable bumps in the road. You will also be much clearer and more confident about what opportunities you are and are not prepared to pursue. If you can show potential lenders/investors that you know what can de-rail your business, and you have plans for managing those risks, you will look like a safe pair of hands.
This blog is simply some pointers to help you manage risks effectively.
What could go wrong?
It's worth making a list of the things that could damage your business or stop it getting off the ground. In no particular order the risks might be:
- Lack of interest in our product/service (which is where market research comes in).
- Legislation or other restrictions prevents us from doing what we want to do. There's no point, for example, buying a plot of agricultural land to build some houses if there's no chance we would get planning permission for the development.
- Theft, flood or fire ruining your stock/premises/equipment or otherwise stopping you from working.
- Short or longer term loss of power/utilities or wifi connection. I can just about manage my own business from a laptop and could relocate to a coffee shop if needed. Many businesses don't have that flexibility.
- Loss of data e.g. through cyberattack or loss of memory sticks.
- Customers, visitors or staff being injured or made ill by your services/product/premises.
- Release of pollutants to the environment
- Failing to comply with legislation or industry guidance (e.g. regarding food or product safety).
- Someone copying your ideas or accusing you of stealing theirs. This is where the issue of Intellectual Property fits into the wider risk management agenda.
- A key account or a key supplier going out of business.
- Changes in market conditions e.g. oil or commodity prices, interest rates etc. Is there any reason that your raw materials could become cheaper or more expensive and what would that do to your business model?
- Customers not paying on time/at all. Do you have or need terms and conditions and formal contract documents? If you needed to enforce the conditions or contract, how would you do it?
- Accusations that you have damaged someone's reputation.
Managing the risks
Successful risk management is about the economic control of these risks. We have to keep things in proportion and spend more time and effort dealing with the things that are most likely to cause a serious problem.
Let's imagine our business idea is "Popcorn Pop Up" or "Corn in the Cab"…essentially a mobile ice-cream or burger van but equipped so that popcorn and/or corn on the cob is cooked and flavoured on the spot (taking advantage of the growth of the gourmet popcorn/healthy snacking market).
Assuming (after doing market research) the business seems viable and we can get the necessary licenses/pitches, your options for dealing with the risks boil down to four options. These options are relevant to every business:
Eliminate the risk: Simply stop a risky activity. For example, we might initially have wanted to cook chicken as well as corn, but realised that we currently don't want the risks and costs of handling/managing raw meat.
Reduce the risk: Reduce the risk to a manageable level. We would spend a reasonable amount of time making sure we are happy with our suppliers and equipment. We don't want dodgy equipment that will frequently break down, for example, or raw products that have been declared unfit for human consumption.
We would make sure we have basic food hygiene procedures/certificates. It would also be important that our equipment is appropriately maintained and our van is roadworthy. There are also likely to be signs in our van warning customers about known allergens in our ingredients (and a witty ditty: "To keep your teeth inside your gob, don't chew on corn that hasn't popped").
Transfer the risk: At a cost, we get other people to take on the risks that we don't want to or can't manage ourselves (e.g. installing the cooking equipment).
Insurance is a key component of risk transference. For example, we must have motor insurance to cover our mobile van. Companies typically take out public liability insurance so that if a member of public is harmed in some way (e.g. they break a tooth on an unpopped piece of corn) the insurance company can shoulder the costs of defending the civil claim (or pay out any compensation that is awarded). Insurance is a specialist subject and you should consider seeking further advice.
You will struggle to get insurance if you haven't taken steps to reduce the risks.
Manage the retained risk: We should have a good idea about the risks that we are left with. We need to keep an eye on them and know what to do if they materialise… What if our van breaks down? What if our supplier goes bust? What if we lose our pitch?
By the end of this process, you'll be able to make critical decisions with much more confidence and have a business which is resilient.
Blog post by Nick Bell, founder of Nick Bell Consultancy