RISK—WHAT IT IS AND WHY YOU NEED IT

Entrepreneurs like to consider themselves “risk takers” but only up to a point. Ironically, when they think they can stop taking risks is when they create their greatest exposure.

Risk is good. Risk is why your company can be profitable. Risk is why you were able to start your business. Risk is the reason why there are rewards. But just what is “risk?” Risk is the balance between potential positive and negative results of an action. By definition, every action involves risk and therefore even if it were desirable to do so, risk cannot be eliminated. Even the choice of doing nothing is an action that involves risk. Every decision that we make in life involves risks. We weigh the potential gain against the potential loss and determine if the action is justified.

We take risks when we are driving—should you go through the yellow light? Should you pass the car in front of you? Should you drive in this weather? All of these and countless others are decisions that you make that require an action. That action could have positive or negative results and we quickly (and often unconsciously) make a judgment that leads to our chosen action. You don’t have to choose correctly in every decision but you must avoid catastrophic choices and you must also choose correctly the majority of the time. In this context, entrepreneurs clearly understand risk. When they decided to start their business they were facing a future that was not acceptable[1] and chose to start a business that had the potential to create an acceptable future. If you are reading this article you were successful because you are still a business owner—you have survived. But has your successful survival planted roots of eventual failure?

Risk is good because it creates reward. The greater the potential for negative consequence in an action, the greater the reward must be for the positive result. Our free market regulates this return. “If it were easy everyone would do it!” is a phrase that entrepreneurs hear with regularity. What you did was not easy. You overcame tremendous odds in favor of failure to establish your company and have created a successful business—now what?

A major illness of mature businesses is comfort. We all reach a comfort zone in what we do—and small businesses are nothing but extensions of their owners. We have been successful and passed the start-up stage. The owner has made a decent living. We are immersed in the daily morass of fires. And sales get stagnant; the bottom line starts drifting, and competitors start pushing us—but things are good, people are happy. We have reached that comfort zone. We no longer need risk—risk might upset our equilibrium. So we continue to do as we have done. But nothing else stays the same. The reason you were able to enter the market is you were able to do things a little differently and a little better than the existing competition. Now other people are doing that to you. Your market is starting to change, the margins are starting to change, the business environment is starting to change but your company is not. You no longer reward people with new ideas so the new ideas no longer appear. You don’t need growth because you are making enough money but the lack of growth is limiting the opportunities for employees and good people are now starting to leave. You start with denial. You know how your business works and your way works—it is someone else’s fault.

When is the best time to address issues—yesterday, today or tomorrow? If you do not answer yesterday, you are going to fail. Small businesses must be run with a sense of urgency. There used to be a day when poor results were unacceptable—your past success cannot allow poor results to become acceptable today. Issues must be addressed immediately. You do not have the luxury of a Fortune 500 company to withstand significant losses. One bad job and you can be out of business. There was risk when you started—but now you have something to lose. That makes it a bigger risk to do nothing. You must protect that investment and “sweat equity” by recognizing that your must continue to embrace risk. You cannot be stupid or reckless but you must regularly “reinvent” your company while keeping your core principles in tact. Change for the sake of change is not good but it is better than no change for the sake of no change. Unfortunately the greatest improvement that businesses make is when their backs are to the wall—and sometimes that is too late. The owner must create a culture where “the system” is well defined but it is made clear that it will constantly be improved. Therefore not bringing up suggestions to improve the system hurts the company; bringing up suggestions helps the company and is rewarded.

At The Fremont Group we challenge business owners to constantly strive to reach that “next level.” It could be operationally, organizationally, financially or otherwise but an organization that doesn’t grow, dies. Our Minding My Own Business Workshops™ provide you with an examination of your systems, procedures and controls. Our follow-up work challenges the organization themselves to implement meaningful change. The risk of three-hours of time can provide a tremendous reward. The choice to do nothing is your greatest risk.


[1] Unacceptable could be for a number of reasons—possibly even boredom. Businesses are often started for other than pure financial reasons and that is a good thing as few businesses actually provide financial security for their owners.