Business Risk Taking: How Many Chances Before You Fail?
In today’s article, I’m going to give you some practical advice about how business risk taking you should be doing when starting your small business.
I’ll show you real-life examples of what has happened to me and fellow entrepreneurs when taking risks in business and the common pitfalls (and future successes, hopefully) to look out for.
The Trial-and-Error Period of Business Risk Taking
Some other entrepreneur friends of mine and I started our businesses right in the middle of the recent economic recession. This was around 2008-2010. It was pretty hardcore, I won’t lie.
We didn’t know if our work was going to succeed. Everyone was telling us how tough it was going to be and the risks were too high. People told us to get a job. Some of the people who started back then actually did end up in a job… Though those who didn’t quit are still in business today.
What we learned from this trial-and-error period was how much risk you should take. Now, if you don’t know how to gauge how much risk to take, your business is likely not to grow. Every single entrepreneur I know who doesn’t take any risk usually sees a period of stagnation over months or even years.
These non-risk-taking types commonly treat their business like a vanity or lifestyle business than a serious one. And when the next recession hits, you can bet that they’re not going to have a lot of momentum to weather the storm. They’re unlikely to survive.
Why It’s More Risky To Stay Still Then Move
Along this line of thinking, it’s actually more risky to not take any risk at all. If you just hoard all of your money and keep it in the bank account, you’re not taking any major risks. Now, if you do know how to take risks properly and what the boundaries are, your business will grow forever. You’ll make your return on investment and you’ll be going up and up.
This is the difference between having a job where it’s kind of static and running a business that is thriving and growing – doing what you’re supposed to be doing and taking smart, calculated risks.
Some of my friends, including myself, are from countries where the economy wasn’t great. What I was little, I lived in some very tough times back in Russia. We were told constantly to never take risks. We were told risks were bad and you’re likely to get scammed. We were programmed against risk taking from day one.
This is a load of nonsense, of course. If you’re in a modernized Western country and living in even a relatively good area, being scammed regularly is not that common of an issue. Even if you lose everything, it’s not going to be a big deal. You can rebound. You can get a job and start over again.
Rinse And Repeat In Business Risk Taking
You can tell your investors, “I’m sorry, I kind of screwed up here” and often they understand. The fact of the matter is that many investors know that 9 out of 10 businesses they put money in to will fail. This is the norm for them. Only one of their investments has to be successful (but very successful nonetheless) for the investor to be making good money.
So, how do you know how much risk to take? I mostly give advice to people who start a business that’s not very large yet. Currently, I teach people with mostly small businesses. For a small business, it’s not that complicated yet, and so the advice I’m about to get you is extremely practical but may not necessarily work for a large business (i.e., $2 million+ a year or so).
But if you’re starting out, if you have a five, six figure business… then you can use this stuff. I use this myself. I learned it from my mentors and I learned it from my own mistakes.
How Many Risks Do I Take A Year?
The way I look at it is that I can make about two to three major mistakes (and I’m talking painful mistakes) a year and I still won’t go out of business. Those are the rough numbers on how many major risks I take in a year.
So for example, I have a new lead funnel into which I pump about 1/3rd of my money. I think of this as okay. If everything goes awry, I only lost 1/3rd of my money. I have two mistakes left to make and 2/3rds of my business is still up and running.
I might make a second mistake like hiring too much people. Oh well, business is still going. The third major risk I might take? Hiring another person who’s highly qualified but very pricey and see how that goes. Doesn’t work out? Still on schedule. I planned it this way.
However, if it goes well… if ANY of these goes well, my business multiplies. See what I’m doing here?
Basically, I’m investing in stuff that can have a very high return on investment in my business. In fact, I’m betting on things that are very likely to have a return on investment in my business, even if there’s some risk involved. Each decision within itself doesn’t really take too much capital but can have a great return for me.
Even if you do lose all the money and you really go into debt… even then you can still get out of it. Later on in business, of course, you’re going to need an accountant that tells you, “Here’s what the balance looks like… here’s how much risk you take…” and so on but for now you can do this for yourself. It’s really that simple.
I don’t recommend you hoard money and then spend it all later. I recommend saving some capital because being close to the margins can be very dangerous for your business, but not as much as you think. A three to six month buffer at least, but after that… you’re safe in most cases.
So, the risk in a small business is quite simple. Just realize that you need that buffer… but it doesn’t need to be some massive hoarding of cash. Take two to three major risks that have a high return on investment and build your empire step by step.