Managing Risk In Your Business
There’s no way to whitewash it: managing risk is part and parcel with entrepreneurship.
People ask me all the time what they can do to eliminate risk in their new business startup, and I just laugh. If you want to eliminate risk, don’t start a business. It’s just that simple. As long as you conduct transactions with customers, there will always be a measure of risk.
Even my friends who just send out affiliate emails are taking a risk every time they click “send.” They could be sued for violating spam rules, for instance. It’s a smaller risk than, say, hiring 100 construction workers, but it’s still risk. Any time you have any exposure to any level of liability, you have risk. Plain and simple.
Rather than working and straining to eliminate risk, you’re better off putting your efforts into mitigating your risks and raising your tolerance for risk. Let me show you how that works.
The Threshold For Too Much Risk
How much risk is too much? To me, that would be like asking, “how much ice cream is too much?” It really comes down to personal preference. Some people have a higher tolerance for risk than others. Think of sky divers, bull riders, stock speculators, and fire fighters. Those are typically people who have a very high threshold for how much they are willing to risk. I’m good for a challenge, but even I have my limits.
I’ve discovered two things about people in pretty much every high-risk career:
- They take big chances because they have done their homework and understand all the variables involved.
- They have grown their tolerance for risk over time.
So, where are you?
Recognizing Your Limits
Listen, just getting out of bed in the morning exposes you to a certain level of risk. Some people I know can’t even do that right now. We might call that fear or depression, but at the root of it is a sense that they are unwilling to face the potential consequences of getting out of bed. They have formed a perception of the pros and cons of taking action and determined that it’s not worth the risk.
There is no reward without risk, but it is possible to take a risk and not get a reward. You have to weigh the odds each time. In fact, we all do it thousands of times a day subconsciously. We are constantly making decisions based on split-second calculations of pros and cons. We do it so fast and so often that we don’t even recognize it. But as the stakes of losing get higher, we obviously become more conscious of the process.
The Other Extreme
So, draw a line from “unwilling to get out of bed” to a guy like Elon Musk who has tens of billions of dollars tied up in stock options. That is an extreme level of risk! It’s like the Civil War soldier who takes his bayonet and charges the enemy cannons. He might not survive, but he has weighed the pros and cons in his mind and determined that the possible win is worth the risk of loss.
My point is that, neither Mr. Musk nor our solider started out in life with death-defying (or prison-defying) confidence. They grow into it over time by taking small risks and beating the odds. They also leverage as much information as possible into their decisions.
Calculate Your Risk Tolerance
It’s true to say that the greater the rewards, the greater the risks. That opportunity for a big reward is what pushes some people to take the big risks.
The biggest risk of being entrepreneur is just being an entrepreneur. You never really know for sure where your next check is going to come from, and there’s no way of anticipating every possible mistake, failure, and lawsuit. But that’s what we are made for. We entrepreneurs are naturally optimistic, reach farther than others, and believe the best of challenges. That exposes us to a wider possibility of failure. But that’s OK with us.
Part of calculating if you are cut out for entrepreneurship is measuring your tolerance for risk, and everyone is different:
- If you want to launch a new business, you have to risk rejection by taking your idea to new people
- To grow a small business into multiple locations or a larger distribution system, you have to risk having a system failure
- Taking a local business to a regional or national level typically requires a gigantic influx of cash, usually from people who want to have a say in how the company will be operated. You might disagree with them
- Your new investor might kick you out of your own business
- You might spend $2.6 million on a Super Bowl ad and the sudden burst of traffic could overwhelm your production systems, causing you to frustrate half the country
- Merging with another company in your industry could cause both of you to go bankrupt
It’s Not As Easy As It Looks
I wonder how many times I’ve seen a major opportunity where the decision maker backed out because the risks were way above his threshold. It would be easy for me to “armchair quarterback” decisions like those (and trust me, I have). But until you are faced with a decision that could leave you a billion dollars in debt to a room full of angry investors, you have no idea what you would really do.
The simplest way to grow a company to the world stage is to leverage other people’s money, influence, and resources. It’s also the simplest way to raise your risk. There is so much more at stake. They expect to get a return on their investment, not a failure. The spotlight is on you and they expect you to perform. You could fail. It happens all the time.
But here’s the other side of that coin: you’re not going to get to that level by making bad decisions. Your bad choices will keep you down. You might get someone to give you a shot before you’re ready for it, but if you blow it, you won’t get a second shot until you can prove that you can handle it. The market is forgiving, but they have a long memory. If you can prove that you have learned the lessons of business and are ready to mitigate your risk, you might earn another shot. That’s why it’s better to make your mistakes and learn your lessons while you’re strong.
The Safety of Small
A friend of mine had a restaurant in a bad location in Minneapolis. The neighborhood was decent, but it was hard to find and parking was a problem. He was complaining to his mentor about his predicament when the older man said something he never forgot. He said, “you’re very fortunate to be so hidden; you can make mistakes here that you won’t be able to make when you’re on the big stage.” When the stakes are low, it’s less risky to take chances, make mistakes, and refine your systems, so that when you get to the big dance, you are ready to shine.
Tips For Reducing and Managing Risk
Like I said earlier, you are never going to eliminate risk from your business. As long as someone can claim you violated their copyright or caused their twisted ankle, risk is reality. But you can reduce your exposure.
Manage Your Emotions
I see risk in terms of numbers now. That’s wasn’t always true. My first business was like my first child to me, so everything felt personal. I was so determined to make six figures from that business that I was unwilling to do anything that felt like it would slow my progress. Because I was emotionally tied to the outcomes, I couldn’t be logical or rational. (I talk about it in more detail on this week’s podcast.) As a result, instead of minimizing my risks, I took bigger risks. I was acting out of emotion (and ego) instead of logic and numbers.
If your sense of self worth is tied to a specific result, you will be damaged by coming up short, and that can end up being destructive to you personally. Some people never recover from that kind of failure, and it’s a shame because it’s preventable.
The bigger my playing field, the bigger risks I can take because I’ve earned the right to play at this level because I make better decisions. I know my limits and I can distance myself from the outcomes.
Do The Math
Part of removing emotion from the equation is managing the numbers. What you don’t measure, you can’t manage. Feelings will lie to you, but numbers will not. When I divorced my emotions from the outcomes of my decisions, it made it easier to trust the logic of numbers. I could make decisions based on how they would impact specific numbers, like cash flow, insurance premiums, customer satisfaction scores, or email open rates. It can be as simple as picking an email subject line that is proven to convert over one that I think is clever, or it can be as massive as the decision to buy another company. Have clear metrics that link to your desired goals, and then obey them.
Know Your Weak Points
When I walk business owners through the 7 Pillars of A Successful Business, it doesn’t take long to see where they are weak. Those weak points are where you are most exposed to failure. If you are a “solo-preneur,” doing everything yourself, your weaknesses are your business’ weaknesses.
One thing I learned early on is that it costs more to do things myself than to pay someone to work in their strengths. I know that I suck at bookkeeping, so I always keep a good bookkeeper close. My team always includes content creators and social media experts, to fill in my gaps. I work an attorney because I know I don’t know anything about law. The key is to surround myself with smart people in the right places, playing to their strengths.
Henry Ford, who revolutionized American industry with the development of the assembly line and interchangeable parts, was a master at this. When asked about his manufacturing process by a visitor to his factory, he responded, “I don’t know everything about my cars, but I know that with a push of a button, I can summon an expert on any topic.” That’s a master-level of delegation.
Find the Best People
Here’s a tip that I share with my friends who are going through this process: if you want the best results, don’t just look for an expert. Look for experts who have an entrepreneurial mindset of their own. Not everyone has that. The ones that do will take responsibility for their own outcomes, seek out their own solutions to problems they face, and work as hard as you would. It’s just in their nature. My team is full of people who could run their own companies, but we have a mutual respect and understanding that maximizes our collective output.
Limit the Variables
Henry Ford had another trait that I admire: he managed his variables. I’ve heard that he once said, “you can have your car in any color you want, as long as you want black.” He understood that by increasing the options, he was increasing his risks. The chemical combinations required to make customized paint might not work on his cars. His painters might not always get exactly what the customer wanted. That exposed him to a higher risk of disappointing customers. Even though it was almost 100 years before bad Yelp reviews were a thing, he knew the importance of managing and fulfilling customer expectations.
A similar thought is to simplify everything in your business. One of the biggest data breaches in recent memory came from a “Big Box” retailer who had cobbled together a customized system that connected their Point of Sale to their inventory control and credit card merchant. Every time unrelated systems have to interface, there is a risk of a breach where hackers can get in. Even closed systems can fail, but when you try to graft unrelated systems together, you multiply the risks.
One of the services my team offers when we consult with companies is to find ways to remove redundant or incompatible systems. It’s often amusing to me to see companies whose sales, marketing, and accounting teams are operating from unconnected databases. It was a wonder they could even speak the same language! I’ve helped companies simplify from 20 different systems to three. You should see how much better the managers sleep! Complex processes are more likely to fail.
Another sure fire way to increase your risk of failure is to keep all your presses in your head. Write everything down. To paraphrase Albert Einstein, if your team can’t explain how you do something to a four-year-old, they don’t understand it themselves. If you do everything from memory, you are eventually going to miss a step and accidentally ship a winter coat to Jamaica.
It’s impossible to grow something you can’t explain your processes to someone else. You must have an boarding system for new employees, and checklists to follow for optimal results. If you want to grow, follow the McDonald’s method. Pimple-faced teenagers can run a McDonalds franchise successfully. That’s why they have duplicated across the planet. They can literally hand a teenager a McDonald’s policy and procedure manual, and reasonably expect that teen to succeed at operating a store.
If you don’t write it down, you will eventually fail. End of story.
Managing Risk Starts With A Phone Call
Risk management is more than having good insurance. It starts with finding where you are at risk and optimizing your operations around it. This is what my team does all day long. We size you up against the 7 Pillars of Business Success, look for gaps in your systems, and find ways to shore up the opportunities for failure. We would be so honored to have a chance to look under the hood of your business and help you get ready for the next level. Call my office or set up an appointment through our website.
Over the next few months, we’ll be interviewing business owners just like you that we have helped in this way. You’ll be able to hear them on the “Messes To Successes” podcast in March and April. We release a new episode every Wednesday morning. You can find them on Apple Podcasts, Google Podcasts, Spotify, iHeartRadio, TuneIn, and anywhere else you find great podcasts. I look forward to having your story on the podcast soon!