How to Decide Which Entrepreneurial Risks Are Worth Taking

If you try to grab every opportunity that crosses your desk, you’ll face a lack of time and resources to take on the ones that have a high probability of success. Many business owners are calculated risk-takers who understand when to take action and when to walk away. A calculated risk is a carefully considered decision made under various levels of uncertainty that can increase the chances of success.

For many entrepreneurs, it can be hard to determine which risks are worth taking. To increase your chances of taking calculated risks with the potential for high returns, consider the following decision process.

Step 1: Research and Understand Risk Types

Risk is unavoidable, but you can minimize your risks and improve outcomes by prepping now. The more prepared you are, the more likely your risk will be in your favor. Taking calculated risks requires you to understand every little detail and possible outcome of the risk – positive and negative. Also, anticipating mistakes can help you identify and address the risks, thus increasing the likelihood of successfully achieving your business objectives.

Step 2: Work on Product-Market Fit

Make sure your product fits the market needs and customer demands you wish to fulfill. Figure out the partnerships and employees you’ll need to bring on board so you can take your products to market quickly.

Depending on your industry, every market will feature its own relative risk, so choose the market based on your target customers’ demographics. Find at least one paying customer before proceeding with a course of action. Avoid risky activities that have severe and likely consequences with low benefits.

Step 3: Perform Cost-Benefit Analysis

Assessing whether a risk is worthwhile involves a careful cost-benefit analysis. Businesses that take calculated risks will be better prepared and have a more cost-effective way of dealing with them. Cost-benefit analyses require you to evaluate investments in risky activities and their benefits. Sometimes, the cost of mitigating a potential risk might be so high that avoiding the risk makes more business sense.

Step 4: Perform Financial Planning

Companies that manage risks are more attractive to investors. The financial planning stage provides an opportunity to develop strategies for reducing overall risks and increasing the probability of a business’ success. Risk management involves time and capital calculation before spending any money.

Step 5: Prepare a Sustainable Strategy

Strategies can help you navigate the risk assessment and risk management that come with your business. A sustainable strategy involves the careful identification and implementation of checkpoints and goals. It focuses on identifying how to deal with risks and can help you survive fierce competition in the market.

Step 6: Document the Risks

Maintaining documentation on how to deal with different types of risk can be invaluable when it comes to setting expectations and preparing for issues before they surface. Documenting production and product testing can help you structure the quality assurance program. Keeping the following accurate records on-hand can help you reduce risks in the production and operations sides of your business.

• The risks surrounding your business activities
• How to respond to a risk event
• Strategies to deal with the consequences
• Effectiveness of your risk management approaches and controls

Step 7: Discuss with Experts

One of the best ways to minimize risk in business is to gain the experience and insight of experts. An expert can help you avoid mistakes and unnecessary expenses in your decision-making process. Transfer the risk of activities with severe and likely consequences and large benefits to outsourcing parties. Although you cannot always control the result – better or worse, you can control how you respond.

Step 8: Evaluate the Risks

Risk evaluation allows you to determine the significance of risks to the business and accept the specific risk or take action to prevent or minimize it. You can do this by assessing the consequences and probability of risks so you can create measures to deal with the outcomes.

Determine the risks that may affect your business and evaluate them for legal requirements, costs and investor concerns. You can also use tools to assess and compare risks. Prioritizing risks will allow you to direct time and money toward the most beneficial options.

Step 9: Check Insurance Options

Some risks can be mitigated with the right insurance plan. Check your insurance options, which can protect your business against such risks as natural disasters, damage to your facilities, lawsuits and any other things you feel could potentially jeopardize your business.

Here are a few tips that you should consider to minimize the risks in your business.

1. Follow a market-centered approach – perform a thorough analysis of markets and customers
2. Adopt efficient risk-management strategies
3. Maintain the right business insurance
4. Keep track of your accounts receivables and minimize outstanding balances.
5. Limit your business loan and financing needs – make them as low as you can comfortably manage to ensure success.
6. Establish a record-keeping system that works from the very beginning of your new enterprise
7. Implement customer service reviews of your products or services before offering them on a large scale.
8. Perform quality control tests to improve your products or services before the launch
9. Find the first paying customer before investing
10. Outsource responsibilities to qualified experts
11. Reduce initial overhead costs
12. Implement credit and payment standards, specifying which credit scores and payment records are acceptable.
13. Reinvest the profit in your business to grow the company without incurring debt.