How to Think About (and Reduce) Risk When Starting Your Own Business

I understand that many of you are in startup mode or still contemplating whether to embark on the risky business of becoming an entrepreneur. My goal for the next few years is to encourage waverers to start their own business, and to mentor some of those who are on their way to become millionaires.

This article will include examples of the risks I took and how I overcame them as presented in my book, “Raise the Bar Change the Game.” I hope you can get some benefit from some real-world examples. Let’s start with four questions to help you think about risk well before you launch.

What’s your tolerance for risk?

It is this idea of risk that is generally the first barrier for budding entrepreneurs. Not only for entrepreneurs, but investors too. A bank or fund manager will always ask you what is your appetite for risk; is it low, medium, or high? If your risk tolerance is low, don’t start a business—because most days will contain some risk or other.

What’s your business idea?

Before you can start a company, you need a business idea. and I always tell people I mentor not to get stuck on trying to find a new and disruptive idea. It’s great if you can, of course, but in my opinion, most of the great ideas have already gone. Unless you have invented something revolutionary, stick with a business model that involves something you are passionate about and do it better than anyone else.

Being passionate about an idea is crucial as it is this that keeps you going through all the inevitable knocks and disappointments. Learn to love your customers and not your product or service. You need to go the extra mile for them, and nothing will be too much trouble.

How will you fund your business right in the beginning?

In the early days, you may have insufficient money and be in a comfortable job with a regular income. This is a good time to check on your partner’s appetite for risk too, as you will need their support. Especially since you may need to have a lower standard of living for some time—they need to be on board.

But don’t use lack of money as an excuse not to start the business—you can always get money either from friends, family, or credit cards. Making sure your customers pay you before you have to pay your suppliers is another way. The important thing is to surround yourself with positive people rather than naysayers who will be quick to throw cold water on your idea and encourage you not to start.

What’s your plan B?

You must have a risk mindset. I always found it helpful to ask, “What’s the worst that can happen if I fail?” The answer was that I’d be back where I started. If I went bust, I could always pick myself up and start over again. I developed a plan B in case things went wrong and I could change my strategy if I needed to.

Finally, I asked myself how I’d feel if I didn’t go forward. Would I regret it for the rest of my life? One of my many mantras is that I have no regrets at all in life, nor will I ever. Never look backward, look forward. Have the courage of your convictions and generate your own self-confidence by ticking off goals and achievements. Recognize that failure is good—provided you learn from it—and always remain positive and mix with positive people.

So what you can you do to reduce the risk of starting your own business?

Write a one-page business plan

Running a business is much less risky if you have a business plan. You can use your plan as a framework for making a risk assessment against every business goal. From there, because you’ve thought through and are aware of all the risks you might encounter, you can strategically mitigate them and adopt a plan B quickly if necessary.

Your business plan can be a one-page plan, meaning that it doesn’t need to be lengthy. If you’ve heard of a Business Model Canvas, a Lean Plan is a much more useful alternative. You can use it as a jumping off point if you end up needing to write a formal business plan for a bank loan or investor pitch.

Beyond business planning basics, like telling what your company does and explaining your business model and how you’ll get customers, take some time to set goals and milestones. If you’re just getting started, think about your top five goals for your first year, and a BHAG (big, hairy, audacious goal)—a dream well into the future where you visualize what your company would ideally look like that seems impossible today.

Be sure to articulate how you plan to achieve those goals and make them SMART: specific, measurable, achievable, results-orientated, with a timeline

Hire the best people

You can’t do everything yourself—if you’re honest, you just don’t have the skills. But until you can afford to hire help, you will have to get along on your own. If you have a friend or partner you trust with complementary skills—such as being a details person if you are a visionary, or vice versa—this is an ideal way to split the shareholding 50-50 percent from the beginning.

When I was starting out, I was fortunate that my wife brought the soft skills to my business, and that she was also willing to be an important sounding board for me. I am a visionary—not interested in day to day management—so now I have someone in each company who runs it on a day to day basis so I can do the strategic thinking. It’s important to understand your weaknesses.

Hire people who are more intelligent and clever than you. They will bring in new ideas and skills. Do not be so proud that you can’t listen to new ideas. Make sure you take interviewing seriously and consider how they would fit in with the culture of the company. Then look at their past performance for clues of future performance.

Focus on profits and cash above all

Nothing lasts forever. Your business’s product or service has a life cycle, so from the beginning, you should anticipate the risk of competitive disruption or replacement.

As your looking at your financials, remember that profits are important, but cash is king. If you don’t have a background in finance, learn how to read basic management reports: your balance sheet, your profit and loss statement, and your cash flow statement. You can have plenty of business and be generating large profits, but if your customers are not paying their bills on time, you can run out of cash and so go bust.

Even the healthiest of businesses ultimately can run out of cash without seeing it coming. I once went to my bank and asked for $50,000 to buy one of my competitors. I knew it would only take a year to show a return on investment—a slam dunk, if you will.

My bank turned me down and put me into incubation where they controlled all my cash movements until I had repaid all my loans from them. My brother lent me the money, and I did get my money back in a year, but the bank had seen that I was spending too much on my other business. The more successful it got, the less cash I had available to service my debts. They saw an additional loan as a bigger risk than they wanted to take. But I knew my cash flow in and out, and I knew a solid investment opportunity when I saw it.

So, learn to read your cash flow position daily, weekly, or monthly. Make it a habit.

Summary

You will be faced with many challenges during the life cycle of your company, so keep your eye on your vision—the big picture—and keep in touch with what the competition is doing.

My biggest risk was to enter the Eastern Bloc prior to the fall of the Berlin Wall in 1989 and create business leaders in five countries, giving them a controlling share in each business. I lost a great deal of money but kept at it, and it took seven years to break even.

Along the way I faced bankruptcy, staff leaving and going to work for the competition, getting kidnapped and held up by the Russian mafia, deaths of significant staff members including my wife, and even adopting a child in the midst of all this.

But my appetite for risk is high, and my self-belief, coupled with my great team, has enabled us to remain market leaders throughout. You can do the same!