Guide To Taking Calculated Risks in Business

Some of us are scared of taking risks, while others seem to leap at the opportunity. In business, taking calculated risks is an inherent part of game, but it isn’t an easy thing for entrepreneurs master. You need to know when certain risks are worth taking, and how to position yourself in a way that makes the risk as risk-free as possible, while still claiming your wins.

What is Risk?

Risk, in business, refers to the potential for loss or harm that may arise during the pursuit of business goals.

Varying levels of risk exist, ranging from operational ones like supply chain disruptions, to financial risks such as investment uncertainties.

Looking out for potential damage can help identify threats to your business, and understanding the level of risk associated with each decision is essential in determining the appropriate actions to mitigate or capitalize on them. Remember that the 7th step of Business Strategy is Paying Attention.

With risk management, entrepreneurs can identify, assess, and prioritize risks to make informed decisions that maximize opportunities for success. It plays a pivotal role in guiding strategic planning and resource allocation.

Naturally, the importance of calculating risk in business should not be overstated. It allows entrepreneurs to:

• anticipate potential challenges
• minimize negative impacts
• seize opportunities that align with their goals and objectives

Without a comprehensive risk assessment, businesses may be exposed to unexpected setbacks that could jeopardize (1) their profitability in the short-term and, (2) their sustainability in the long-term. So, a good entrepreneur knows when a risk is worth taking and knows how to form that calculation. 

Why Calculated Risks Are Important

Over the course of their career, successful people often learn that their chances of success are slim:

1. Without some degree of risk-taking and, 
2. When playing it safe all the time. 

That’s because when innovation is limited, your competitive advantage dissolves. You could miss out on various opportunities such as entering an upcoming market with high profitability, or you could lose market share by going with the herd on a trend that’s not only built on shaky foundations, but is also actually a threat to your business. Eventually, these could lead to a damaged company reputation. Not the best situation to be in, whether you’re growing your business or already established (think to when The Body Shop’s reputation plummeted after L’Oréal acquired it).

The benefits of taking strategic risks in business are multifaceted.

It can lead to competitive advantages, increased market share, and enhanced brand reputation. By carefully assessing the potential risks and rewards, entrepreneurs make informed decisions that drive sustainable growth and profitability.

However, when it comes to taking big business decisions, the amount of risk you’re willing to take is not directly proportionate to your success. Managing risks is what makes the difference as it requires significant effort to prepare your business and resources to avoid and overcome the negative consequences of poor risk management. 

Examples of Calculated Risks

Investing in New Technology

Purchasing new software or equipment that can streamline operations or improve product quality, with the understanding that initial costs may be high but long-term benefits outweigh them.

Expanding into New Markets

Launching products or services in new geographical locations or demographic segments, after conducting market research to assess demand and competition.

Hiring Additional Staff

Bringing on more employees to handle increased workload or to expand into new areas, despite the initial expense, in anticipation of increased productivity and revenue.

Launching a New Product or Service

Introducing a new offering based on market trends or customer feedback, understanding that there’s a chance it might not gain traction but confident in its potential success.

Taking on Debt for Growth

Securing a business loan or line of credit to finance expansion plans, with the understanding that debt comes with interest payments but confident that the investment will generate sufficient returns to cover them.

Entering into Partnerships or Joint Ventures

Collaborating with other businesses to leverage each other’s strengths and resources, knowing that partnerships involve sharing profits but also sharing risks and that the combined effort can lead to greater success.

Investing in Marketing and Advertising

Allocating a significant portion of the budget to marketing campaigns or advertising efforts, recognizing that there’s no guarantee of immediate returns but trusting that increased visibility will eventually lead to higher sales.

Launching a Limited-Time Promotion or Offer

Offering discounts or special deals to attract new customers or encourage repeat business, aware that it might temporarily reduce profit margins but confident that it will drive overall revenue growth.

Diversifying Revenue Streams

Expanding the range of products or services offered to reduce reliance on a single source of income, acknowledging that diversification involves some degree of uncertainty but believing it will provide stability and growth opportunities in the long run.

Pursuing Innovation and Creativity

Encouraging experimentation and innovation within the business, knowing that not every idea will succeed but understanding that pushing boundaries is essential for staying competitive and adapting to changing market dynamics.

Bullet-proof tips for entrepreneurs looking to taking a calculated risks include clarifying their objectives, conducting thorough market research and testing small. 

Here are some more steps to successfully calculating risks and making better decisions for your business:

1. Define Your Goals
   1. Clearly outline your business objectives and what you aim to achieve.
   2. Understand how taking risks aligns with your long-term vision and growth plans.
2. Assess the Risk-Reward Ratio
   1. Evaluate the potential benefits of the risk against the potential losses, it’s a type of cost-benefit analysis.
   2. Consider the probability of success and failure for each scenario. This will help you identify the value of a risk, whether it’s worth it not. 
3. Conduct Thorough Research
   1. Gather relevant data and information to make informed decisions.
   2. Analyze market trends, competitor strategies, and consumer behavior.
   3. Seek advice from industry experts or mentors who have experience in similar situations.
4. Develop Contingency Plans (Strategic Scenario Planning)
   1. Identify potential obstacles and challenges that may arise.
   2. Plan alternative courses of action to mitigate risks and minimize negative impacts.
   3. Prepare financial buffers or backup strategies to handle unexpected outcomes.
5. Start Small and Test
   1. Break down the risk into smaller, manageable components.
   2. Pilot test new ideas or initiatives on a smaller scale before committing fully.
   3. Use feedback and performance metrics to gauge the effectiveness of your approach.
6. Trust Your Intuition
   1. While data and analysis are essential, don’t ignore your instincts.
   2. Trust your gut feeling when making decisions, especially in situations where information is limited or ambiguous.
7. Embrace Failure as a Learning Opportunity
   1. Understand that not all risks will lead to success, and failure is part of the entrepreneurial journey.
   2. Analyze failures objectively to identify lessons learned and areas for improvement.
   3. Use setbacks as motivation to refine your strategies and approach future risks with more resilience.
8. Build a Support Network
   1. Surround yourself with mentors, peers, and advisors who can provide guidance and support.
   2. Seek feedback and perspectives from others to gain new insights and challenge your assumptions.
9. Monitor Progress and Adapt
   1. Continuously monitor the outcomes of your risk-taking efforts.
   2. Be willing to adapt and pivot your strategy based on evolving circumstances or feedback.
   3. Stay agile and responsive to changes in the market or industry landscape.

For a new business or green entrepreneur, this can feel like a lot, and it may be daunting to even consider all of these aspects. But failing to properly evaluate the situation and potential scenarios will result in undertaking unnecessary risks- and subsequent losses.

Failing to take calculated risks will incur damages far more significant than what any potential rewards are worth- because you will have to pay time, money, human AND capital resources to fix the consequences. 

By evaluating potential risks and rewards, entrepreneurs make informed decisions that align with their long-term vision.

Determining how much risk is too much for a business requires a thoughtful analysis of the risk tolerance and financial stability of the company. Entrepreneurs should be willing to take risks that challenge them without compromising the core operations of their business. It’s a fine balance between prudent risk-taking and reckless decision-making.

Tools to Support Calculating Risk In An Effective Way

It is best to take risks based on the insights derived from using structured tools. These frameworks serve an entrepreneur in identifying, tracking, and mitigating risks effectively. The following tools are commonly used for risk-management. They provide a structured approach to assessing risks, prioritizing them, and developing appropriate risk mitigation strategies. Each tool offers unique benefits in analyzing and managing risks across various projects and industries.

Risk Matrix

This tool quantifies risk by combining probability and impact scores to categorize risks into low, moderate, or high-risk levels. It helps you eliminate biases in perceived risk level. 

Bowtie Model

This is a visual tool shaped as a bowtie. The main risk is demonstrated in the middle in a circle. On the left side of this circle, potential causes or threats (leading to the risk) are listed. Meanwhile, the right side displays potential consequences of the risk event. 

Decision Tree

This is one of my favourite tools as, like a tree, it creates a logical sequence of branches illustrating potential outcomes- like a flowchart. This is an excellent tool for strategic scenario planning with the goal of helping you:

1. understand how to apply policies or
2. choose between different courses of action

You use it by identifying your ‘root node’, which is the primary decision, framed as a question. From there, you have two branches, one saying ‘yes, decision taken’, the other saying ‘no, decision not taken’. From each of these branches, you list the potential outcomes again framed as questions with two or more options, and continue onwards until there is no further trickle down effect. To take this further, you can weigh each option with a realistic probability. These weights are used at the end of your analysis to determine the risk level of the primary root node. 

Failure Modes and Effects Analysis (FMEA)

FMEA is a tool to map out potential modes of failure. It serves to identify the causes, effects and existing controls of potential failures so that you are then able to determine the required actions to mitigate it. FMEA can be used in design, processes or product assessments.

What To Consider When Calculating Risk 

So, when evaluating their risk appetite, entrepreneurs should consider factors such as:

• market dynamics,
• competitive landscape,
• financial resources,
• their business capacity and constraints,
• growth objectives

It is essential to strike a balance between ambition and prudence to ensure that risks taken are in line with the overarching business strategy.

It is true that certain key risks, such as entering new markets, investing in research and development, or expanding operations, are often necessary for entrepreneurs to achieve business growth. But they must be taken with sufficient and effective preparation. That’s because when an entrepreneur does their due diligence, taking calculated risks carry the potential for significant rewards and pave the way for sustained success in a competitive business environment. 

If You’re Afraid of Taking Risks:

Starting a new business is no easy feat and you may be fearful of taking a risk that could bring more uncertainty into an already very turbulent economical situation for your business. Sometimes, it’s less stressful to just stay at your comfort level and move as you are, or with the herd.

But taking risks is even more important for small business owners who operate in competitive markets where innovation and bold moves are key to standing out.

But, it is crucial for you to recognize that risks are inherent in pursuing growth opportunities. By taking risks to achieve success, you can propel your businesses to new heights and remain relevant in a rapidly changing landscape. Risk doesn’t always mean failure- especially if it’s managed well. And you’re in full control of how much risk you’re willing to take as the business owner. 

So, stepping out of the comfort zone is a prerequisite if your goal is to propel your business forward. 

This entails embracing uncertainty, embracing failure as a learning opportunity, and continuously seeking innovative solutions to market challenges. Things don’t go as planned, but by being prepared and considering your possible threats and obstacles, very few things will be a surprise, and you can pivot quicker.

By challenging themselves, entrepreneurs open doors to new growth possibilities and develop the confidence to take effective decisions in unsettling circumstances.

If You Don’t Have a Fear of Failure:

You may be an entrepreneur who does not fear taking risks. Instead, you may be prone to taking decisions very quickly or impulsively and believe you’ll be able to pivot no matter the situation. Your self-trust is high. That’s not a bad thing. However, from experience, an entrepreneur is not always able to pivot with such ease, if at all- especially when a series of poor and risky decision-making results in a compounding negative effect that destroys your business.

So, to overcome this, entrepreneurs can conduct a risk assessment: when making a decision related to your business, consider every possible outcome. Write the decision down and create a decision tree or a flowchart with simple steps showing all the small and big consequences. Ask “what if?” from every possible angle at every small step. This will help you identify: 

• new opportunities, 
• potential issues and,
• next steps based on scenario planning

This activity will help you assess your chances of succeeding as it increases your ability to identify and thus evaluate the risks worth pursuing. In doing so, you are better poised (with relevant data) to develop strategies to help overcome potential risks. You now have a game-plan. 

All in all, calculated risk taking better equips you to prevent potential negative outcomes.

For entrepreneurs who are not risk-adverse: seek to slow down when making any decision for your business. Analyze the likelihood and impact of potential risks of executing those decisions on your business objectives and long-term health. By gathering data, seeking expert advice, and leveraging technology, entrepreneurs can better understand the risk level involved in executing various decisions and thus make proactive choices to mitigate adverse outcomes.

Strategic planning will become your best friend when taking calculated risks.