Learning How To Manage Risk By Thinking Things Through
Business is to a certain extent about risk but it needn’t always be risky, that’s another thing altogether.
Many entrepreneurs starting new businesses borrow to get them started, often from family and friends which always carries the additional risk of falling out with people that are close to them in a personal sense.
I always advise people to try and borrow commercially before approaching family or friends, leaving that option as a last resort rather than port of first call.
If for any reason the proposed business doesn’t work out as planned at least your personal life stands a chance of remaining intact and supplying you with the emotional support you need in those circumstances.
We are currently considering investing in the energy sector and as such are looking at Fracking, which is essentially the practise of fracturing localised rock by injecting pressurised liquid combined of sand & chemicals into crevices which lead to deposits of gas or petroleum migrating to a preformed wellbore which is concrete lined.
Fracking is highly controversial as there are instances where minor earthquakes have been created, but with reputedly over 30% of the energy needed by the United States now coming from sources directly associated with fracking the practice is unlikely to go away. Only time will tell whether fracking is safer than, say Nuclear, but unless we all want the lights to go out more energy from whatever source is essential.
Many countries have large deposits of shale gas which is the main substance created by the fracking industry including the UK, Brazil, Argentina & China among others.
I mention all of this in my consideration of risk because this industry along with other energy based industries such as drilling for oil or digging coal show how risk can be managed on a macro scale.
Exploration of anything spells risk by another name in that a company at the exploration stage is only exploring the ‘possibility’ that something worthwhile to society & therefore valuable might exist below the soil, sea or even ice. They try to reduce the risk by offloading some equity in the form of shares to other people who believe in the management team promoting the possibility that they have found a valuable resource which will return everyone’s investment of time or money many times over. That, or as sometimes happens they lose everything.
It’s this risk reward ratio that determines whether a company or individual decides to invest time or money & often both and you can be sure that everything was considered on paper before anyone started spending big money.
George Osborne the UK Chancellor of The Exchequer who held the Country’s purse strings was criticised by some people, even members of his own party for giving tax breaks to companies willing to take the chance & drill for shale gas in the UK.
I do not intend to get into any debate over whether he was right to do this but would merely comment that in the early stage of attracting people to take what is essentially an enormous risk, any help is useful.
At the micro business level which is the end most new entrepreneurs operate at, managing risk is just as essential & my advice is to look at what the big boys do, i.e. on paper first.
Firstly write down your objectives & include how you intend to finance the early stage? Next consider where you will operate from? Do you really need that office which will be a financial risk or can you work from home until you see how it goes? Can you manage with whatever car you’ve got rather than leasing a new one?
Do you need that van as well as your car or could you have a tow bar fitted to your existing car and save on the cost of purchase & running another vehicle. Trailers can be very cost effective to buy or hire & do not require road tax or an MOT. I would make sure that whatever you do is legal & roadworthy though & make sure your driving licence covers you.
Test your business by writing out how you think it will work in the first & second years because they are the critical ones. This is managing risk in a micro business sense. Mistakes on paper waste only time and ink whereas mistakes made later when your business is in full flight could spell disaster.
Learn how to manage risk by thinking things through before committing your time and energy to the cause.
Is there a market for your product or service & do you have the skills & capital to enter that market? Those are the first questions to ask yourself & will ultimately predetermine your risk.
Original article for the Urban Times July 2013.