How do you quantify the business risk better and make smarter decisions?
One of the most important things that business owners need to realize is the danger they face for their companies, both for the short and long term. In other terms, make sure you assess long-risk even while looking at short-, not just short-, projects— and vice versa. Projections for these groups are always of a different type and various considerations may need to be weighed to make the right decisions.
What is Risk?
Before we address long-term or short-term risk, let’s describe “risk.” Risk is a word often confused with expected losses, but risk is fairly clear, in fact. Or put it simply: Risk= Uncertainty. Often unexpected risk can lead to losses, but risk and loss are not the same thing. When you ask yourself how much risk a decision entails, you wonder what variables are you unsure about and how much uncertainty you will face when making a decision.
For example:
If you own a grocery store and past history and experience tells you that every month you’ll probably lose 10 percent of your inventory to spoil–that’s not a chance! You know that’s going on and it can fit into your pricing. However, if you are considering an action with the potential to increase the amount of spoilage you get every month, but you don’t know by how much, that’s a chance, and the degree of uncertainty dictates how big it is.
You should be thinking about the issues in your company about which you have the greatest uncertainty and which of those could have the greatest effect from this uncertainty. When considering your various choices, the choice that provides the lowest level of uncertainty and the highest level of possible positive effect is likely where your efforts will be centered. Such measures should be avoided with high degree of ambiguity and high potential for negative effects.
Each company needs to concentrate on three aspects to better understand your business risk, which may differ depending on your business model and customer base:
- Measure danger
- Control the harm, so that you can respond
- Wherever necessary, take steps to mitigate the risk.
All three of these areas are relevant as none of them are adequate to operate your small business on –
- You can’t mitigate the risk away from measuring and without measuring you won’t be able to get a good imageon an economic level.
(2) You can’t get away with just tracking, because it doesn’t prove the correct signal to construct the calculation on top of it without the measurement system.
Business owners have many tools available to help you evaluate and quantify your business risk. There are also services to provide industry and customer feeling knowledge. Moreover, through public entities and colleges, there are advisors and services at little to no cost to help you better understand and minimize the business risk.
Knowing Short-Term vs. Long-Term Risk Impacts: Short-term risk can cause short-term productivity disruption and growth, manifestation periods are significantly different for what you would find long-term risk. This is possible to see a seasonal variance, but not significant shifts in the underlying market, because, for example, a retailer, you will certainly not see an rise in risk stretching over a five-year or longer period.
If your company was a used bookstore, you can see changes in your sales month by month. Even in the last decade you wouldn’t have seen a decline in printed books. You couldn’t then make short-term decisions based on the long-term risk, because you didn’t even know it was there.
Your most successful approach to coping with long-term risk is to hedge or diversify to ensure at least that the long-term risks are not associated. By growing the complexity of your business model, you can also reduce the effect on your market.
Cyclical Businesses:
Cyclical company should start doing it in the downtime, to make sure they know if it is an inflection point in the normal process or a shift of structure. There are several situations where a company hits an inflection point for a period that involves such a significant market change that you need to accept a systemic change in order to set up your company to exit into new opportunities. This is necessary when the research shows that the market and current business have changed and is likely not coming back again (think record shops).
Whatever long-term risks your company poses— new tech, new goods, etc. if you have correctly evaluated the risks and set up your strategies accordingly, you will be able to adapt and respond to any market change in a timely manner.
Where will Small Businesses improve?
Long-term risk is what many small companies are struggling to predict correctly. Since they work too hard to remain competitive and successful in the short run — they don’t have the luxury, or take the time, to consider the long-term risks they face.And, when evaluating the risks that your company faces, make sure that you understand the long-term threats to your company and your industry while determining the threats in the short term. Don’t be afraid of your industry’s shifts — come to them with new ideas and taste, and your company will be set up as best it can to solve any challenges you can face.
Author Steve Maleh
A seasoned businessman and 3rd generation entrepreneur, Steve Maleh has founded and started dozens of businesses over the past twenty years. From retail, to restaurants, to technology, several of which were sold, and several of which are multi-million dollar operations today.
Prior to his venture into the mobile space, Steve used his Architectural degrees to build, develop and renovate over 30 million dollars in real estate.
In addition to his own businesses and ventures, Steve has been actively sharing his expertise and knowledge with other entrepreneurs. Acting as an angel investor in several start up retail businesses.
Steve Maleh holds a Bachelor’s degree in Architecture and entrepreneurship from the University of Miami, and has also taken master classes at Columbia University in real estate developing and entrepreneurship.
Steve is currently looking forward to being part of the future innovation in the theatre application market with the launch of his new technology venture SNAX®.