Being an entrepreneur is one of the most fulfilling things a person can do, but it also involves taking significant risks. To manage these, you must be prepared for the risks that you might have to take during your entrepreneurial journey.
Being aware of the common risks that entrepreneurs face can help you carefully plan for the future. Following you’ll find a list of 16 risks that every entrepreneur has to take.
1. Innovation and Opportunity Risk
Considering the fact that customers have ever-changing demands, entrepreneurs are consistently able to find opportunities for new business ventures. Every entrepreneur accepts this risk as the cost of business ownership and they understand that their ventures might fail if not calculated well.
2. Career Risk
Once you venture into the world of business ownership, you could be too busy to secure or sustain an alternative line of income, so you might have to quit your current job to dive deep into entrepreneurship. Although some people have the luxury of a backup plan or an option to resume their career if things don’t go well in their business, many entrepreneurs also work part-time in the beginning so they have a safety net to fall back on.
3. Abandoning Regular Paychecks
In the first few months of a business, there is usually no guarantee of any personal income. In the first few years, you’ll need to work toward sustaining your company instead of envisioning a steady income. Therefore, make sure you have at least the budget for this period in reserve to keep your business afloat.
4. Sacrificing Personal Income and Time
Many entrepreneurs can start their ventures relying solely on external funding, such as angel investors, government grants, loans and crowdfunding campaigns. But some entrepreneurs are unable to secure outside funds, necessitating them to invest personal savings to get the business started and keep operations running. It is a high risk to take, but once things start to pick up, it often turns out to be a risk worth taking. Entrepreneurs might also need to invest personal time and experience much more stress than usual. How you manage this risk could determine how big the reward of entrepreneurship will be.
5. Financial Risk
Every entrepreneur has a financial plan showing income projections and the expected return for investors. If you don't have sufficient revenue to meet your financial obligations, your business might run out of money. You can mitigate financial risk by forecasting and budgeting cash flow and making sure that your income always exceeds your expenses. You’ll need to actively manage your cash flow, predict demand and supply, stick to a strict budget and find ways to reduce business costs to minimize financial risk.
6. Estimating Demand
Entrepreneurs often evaluate their target customers’ interests, but there’s a chance that they overestimate the market demand for a particular product or service. And if your projections are wrong, you may not achieve projected sales volumes. Changes in customers’ interest due to any reason may also make you vulnerable to this risk. Therefore, it is a better idea to analyze your target customers’ demands and industry trends thoroughly before launching, and frequently as you grow.
7. Trusting Business Partners and Employees
When you start your business, you’ll probably have a small team of employees working with you. To get the jobs done on time, you’ll need to put an enormous amount of trust in your business partners and employees. However, trusting others is one of the most common entrepreneurial risks. There are so many issues that can arise in case this trust turns out to be misplaced. Therefore, entrepreneurs should build a team of managers who can lead employees in the right direction to reach their goals.
8. Competitive Risk
Every business faces competition from its rivals, but to minimize competition, you must run a proper SWOT (strengths, weaknesses, opportunities and threats) analysis of your industry. To stay ahead of your competition, always be aware of your competitors and patent your innovations.
9. Market Risk
Market risk refers to the risk of loss due to market fluctuations. With the volatility in global currencies, many businesses are exposed to risk, particularly while tapping into overseas markets. Therefore, managing foreign exchange risks should be the priority for companies with customers, suppliers or production in foreign countries.
Entrepreneurs should keep a close eye on these future risks to keep their profits intact. To mitigate this risk, you should develop and implement various strategies that can inform you of potential changes or disruptions in market trends.
10. Cybersecurity Risk
With businesses embracing digitization and increasingly relying on data and IT systems, the risk of cyber threats has grown in recent years. Cybercrime is a growing problem that affects businesses of all sizes and in all industries. The cybersecurity risks not only lead to trust issues, but also amount to billions in losses. To protect your business, you should identify prospective cybersecurity risks and secure those areas.
11. Technological Risk
Every entrepreneur has to face technological risks, thanks to constantly emerging new technologies. Many business owners face losses due to technology failures, such as the crash of their e-commerce website or malfunctioning equipment. In addition, incorporating new technology into your business can pose some risks, such as the cost of the programs or devices that may outweigh the profitability of their applications.
To be competitive, you should invest in upgrading your systems and processes, which could drastically affect the bottom line of your business. To mitigate technological risks, plan for the future so you are ready with new technologies at all times.
12. Strategy Risk
Since companies plan for future goals, there is always a chance of things going wrong because the future is uncertain. The combination of an inappropriate pricing, marketing and distribution strategy can lead to a high potential for risk. With changes in the market or the business environment, you might struggle to reach key performance indicators with current policies, requiring a different approach. Analyzing and upgrading your strategies in light of your evolving business' needs and market trends can help you reach your goals faster.
13. Economic Risk
A company’s success can be affected by external economic factors, such as tax rates, market forces and recession. Use financial and insurance institutions to deal with such types of risks. Changes in interest rates can also affect a business' bottom line. The more variable-rate debt your company has, the higher risk you'll experience, which can make your budgeting and planning uncertain.
14. Customer and Counterparty Risk
Starting a business presents the risk of customers and counterparties not fulfilling their contractual obligations. This risk often increases when the companies do business across international borders, since unforeseen political and economic risks can jeopardize the company’s receivables. Third-party firms’ failure to deliver essential services on time might prove to be costly for your business. To minimize these risks, check testimonials from other clients and back them up with a thorough background check before partnering with another firm.
15. Credibility Risk
The credibility of a brand helps in establishing the business and can influence the purchasing decisions of potential customers. An entrepreneur faces a credibility risk when launching a new product or service in the market. When starting a new company, credibility is typically low, since most customers prefer to buy from a brand they know and trust. Taking credibility risks can often be necessary for entrepreneurs.
16. Design and Development Risk
Every entrepreneur is likely to experience design risk when a product or service does not meet the required performance standards. Most entrepreneurs have to make multiple goals contingent on a handful of deadlines. Development risk occurs when the product or service design is not completed on time, within budget or has defined specifications. You can reduce these risks by running continuous checks and communicating regularly with staff.