How Risky is Entrepreneurial Life?
To seriously consider taking the entrepreneurial leap already sets a person apart from the vast majority of men and women who will never come close to actually leaving the world of regular wages or salaries. However, the cold and often harsh reality of the risks taken typically come with that leap – when the last pay check is left behind and life is reduced to a single objective – make the business work. It is perhaps the most “arresting” moment in anyone’s working life and it can be overwhelming if you are not prepared.
Entrepreneurship entails the risk of walking away from a relatively secure job or career path to create something new, the risk of taking yourself (and often your family) into a realm of stress and uncertainty and the perhaps even bigger risk that you may have miscalculated the opportunity or your own internal resources as you begin a new venture.
Before we look at business, it is worth defining exactly what we specifically mean by the term “risk”.
The dictionary defines risk as follows:
Another definition is: “the possibility that an undesired outcome – or the absence of a desired outcome disrupts a project. Risk management then is the activity of identifying and controlling undesired project outcomes proactively.”
Following on from these definitions, exposure to these “misfortunes”, occasions of “loss”, or “undesired outcomes” generally comes from particular events or what are more commonly called hazards. Some hazards are known and are quite readily discernible, while other hazards are not yet known and are hard to discern ahead of time.
Do you agree with the proposition: “Risk can never be totally eliminated”? Strictly speaking, this proposition is much more likely to be true than false. Even when one risk is eliminated completely another risk may still exist or even be created. However, we can help to manage risks substantially (and thereby reduce their potential impact) if we increase our awareness, measure the risks, and plan ahead to deal with the consequences. Elimination of the risk is one of the four primary ways we can deal with a risk. The others are avoidance, finding alternative methods/substitution/transference, and mitigation.
Preparing for the risks of enterprise
All forms of business have some degree of risk. These risks may bring losses but they may also bring profits and expansion of the business. A focused entrepreneur should consequently be able to analyse all business ideas and plans and identify those that represent a serious risk to their business (in terms of both possible upsides and downsides). All the same, risks cannot be avoided in business. If a particular risk involves too much time and money, it is wise to steer clear of it unless there are sufficient contingency resources to deploy. After all, ideas that promise a large profit are often the same ideas that can bring enormous loss to a business.
There are many risks associated with businesses, some of which can be avoided and others which just become part of an entrepreneur’s day-to-day life. One of the greatest risks in a business is the risk of running at a loss. This can be caused by many factors including bad business decisions, recessionary conditions and other changes in the market. Some changes reduce a buyer’s purchasing power meaning that the products in a business might not be bought for a long time (and just “sit” in inventory tying up your cash). This eventually translates into losses.
Another significant risk factor to the entrepreneur involves normal fluctuations in the market. Since the market cannot stay stable at the same rate all the time, business owners sometimes experience losses due to factors that are beyond their control.
Another risk factor for entrepreneurial business managers is paying off any loans that have been taken out. Most business owners take out loans in order to start their business (from public or private sources). When their business is not making as much money in general, they run a risk of not making enough money to sustain their business and pay off the loan at the same time. Some business owners are forced to close their ventures at very early stages due to this and preparation and planning ahead is therefore crucial here.
A particular risk factor associated with employees is not making enough money to pay their salaries or to maintain the business. Many business owners are forced to take loans in order to sustain their employees. If the business does not progress, they eventually have to think of either laying off some employees or shutting down the business.
Competition is another risk factor that affects entrepreneurs. Although a little competition is healthy for a business, some forms of competition become so great that the business owner is forced to scaleback, or even shut down completely. This normally happens when a larger company takes on the same business as a smaller company that cannot afford to publicise or promote their products or service.
In the final analysis, it is important to realise that no opportunity is risk-free and we need to have the courage and fortitude to take decisions and then manage the risks – including those of complete failure. If an individual is not prepared to accept the possibility of failure, he or she should not attempt a business start-up.
What are the major risks you can think of so far in the enterprise you are considering?
The specific risks you face will be unique to the business enterprise you have in mind. However, some key areas you should think about including:
- Chances of suffering from financial losses. A businessman or woman faces setbacks in business in case the market is not favorable or there is general economic decline. Recession, for example, causes such setbacks to business people. Products do not get sold in the market as the purchasing power of the individual comes down. Business people cannot sell their products and as a result are unable to make profits.
- Market fluctuations. The market does not always remain stable. It fluctuates in many ways and may even be highly seasonal. Many variables cause this. Steady profits may not always be there so planning for a “rainy day” becomes critical.
- Loan payments. An entrepreneur is usually in debt as he or she has to borrow money to invest.
- Often he or she suffers losses and is unable to pay up the loans.
- Poor recruitment. Employees are not as effective or efficient as they should be in their jobs or are less committed than they could be (late starts, early finishes, excessive absenteeism etc.). An entrepreneur loses out financially and in terms of customer service in such circumstances.
- Competition. Stiff competition can wipe out a business completely. Many times small ventures cannot survive the onslaught of big ventures. The latter have money to advertise and publicise their products. They may also drop prices to very low levels to drive a smaller venture out of business.
What attention do you need to give to risk management? What risks need more careful evaluation in the entrepreneurial business you are considering?
Although we cannot completely generalise, there are three main reasons why proper risk management fails:
1. Lack of time or money. There is no doubt that on-going risk assessment takes more time than avoiding the risk evaluation of future plans and projects. In addition, there are short-term implications for both direct and indirect expenditure in performing any kind of substantive risk evaluation work (especially in a start-up business). Hence, the time and money spent on risk appraisal is too limited or even non-existent.
2. Over-analysis. We have all heard the expression “paralysis from analysis” or a situation in which we spend so long in considering our options that we may miss a critical deadline or opportunity. The more analysis work, the more paperwork is generated, and that means a bigger administrative burden or just more paperwork than an entrepreneur can handle.
3. Perception that too much risk focus creates a negative image. Nobody wants to be seen as a pessimist but an entrepreneur who often talks about the negative consequences of future options or projects may well be labelled this way by others. Even if this does not happen, he or she may be labelled as sceptical or pedantic (or perhaps not pragmatic or flexible enough by continually raising detailed objections and difficulties). Perhaps worst of all, there is often very little to be gained from putting in time and effort to prevent problems from arising. It is often far more valuable to be a driven, action-orientated “fire-fighting” leader, as and when a crisis occurs.
The root cause for the above perceptions or beliefs is that entrepreneurs themselves often do not understand the value that proper risk management delivers. As a result, they are reluctant to assign adequate resources for risk management activities. Conversely, where resources are limited, they might sacrifice these activities first if the budget or schedule comes under pressure.
An entrepreneurial life is not for everyone but if you do want to consider it (inside an existing business or when you are a starting a new one) you will need to have the temperament for the task and be prepared to perform many roles (or wear many hats). As the statistics above indicate, there are a number of common characteristics of entrepreneurs but none of these needs to be an inhibitor if an individual is truly committed to the cause and has a good idea that they want to personally take it to market.