Knowing how to identify entrepreneurial risks doesn’t make you a wimp

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English: Young Dutch entrepreneur Danny Mekic
English: Young Dutch entrepreneur Danny Mekic (Photo credit: Wikipedia)

A year can be a long time in the life of an entrepreneur. At the beginning of this year a new fast-food takeaway restaurant outlet started in my local community with much promise. The product quality was good and the staff really tried to give good service. But before the end of nine months this business shut its doors.

You know how it is, once a business person like this decides to open a new business family and friends tell him or her what a good idea it is and give him or her all the encouragement. They say well-meaning things like “you’ll make it”, “I know you can do it” and “you’ve done it before, you can do it again”. This is in the nature of things. People are encouraging and want to be supportive. But comments like this may give you a sense of false security, thinking you can do what others have done but better.

Perhaps the main reason why this fast food restaurant business went bust is because the business owner didn’t correctly calculate customer demand. Knowing that a previous fast-food and restaurant chain had left the same premises about eight months before should have struck warning bells. The red flag that should have been flying in this entrepreneur’s head was potential customer demand. Economic circumstances had changed. Customers had moved elsewhere.

What could this entrepreneur have done differently? Well, one of the first things would have been to do a market survey whether formal or informal. There are low-cost ways of assessing market potential such as interviews and surveys. No-cost methods are also available to entrepreneurs including basic desktop research of the suburb or local community. Other business people will also provide invaluable insight. A small entrepreneur may not have the market research resources of the giant supermarket chains who are able to find out household income, property ownership and expenditure patterns but they can get smart and find basic information.

If you were thinking of starting something of your own whether on the side or full-time, what areas of risk could you identify that may have the potential to snuff out your dream business? What snares and traps are waiting to kill your business? What forces are lurking below the surface that you may not have a clue about?

As an entrepreneur you may face two types of risks – speculative risk and pure risk. Speculative risk is really the uncertainty whether something you do will result in a gain or loss. Customer demand that turns out to be too low is a speculative risk. Pure risk might mean unforeseen events such as being killed because of high levels of crime or a fire or flood. The myth is that entrepreneurs take on big risks and get big rewards. But if you look at the lives and case histories of entrepreneurs you find that they prefer to take as little risk as possible and farm out as much risk as they can. They also know about the different ways to reduce risk:

– Risk assumption (risk absorption or risk retention) which means that an entrepreneur needs to accept the risk of loss. For example, this might be shrinkage. Yet a smart entrepreneur will reduce shrinkage through security systems.
– Risk transfer which means shifting the risk to someone else such as an insurer.
– Risk avoidance, which means not taking on any activity that has a high risk and is too costly.
– Risk reduction, which means minimising your risk through management systems such as for health and safety, quality, environment and financial.

If you are planning to come up with a new idea for product or service or are stuck in developing your new idea, you may want to consider putting your name down for a new resource “Breakthrough Ideas” which is a step-by-step guide to help you reduce the risk in the development of your new business idea.

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