A group of people stand around a table scattered with papers and forms. The person in the center is wearing a red button up shirt and holding an electronic tablet with one hand while gesturing with the other. The person in red speaks to a woman in green standing across the table and facing away from the viewer. Two men, one with white hair and one with dark hair and a dark beard, round out the group.
Other people aligned with your business will be able to suggest risks that you may have missed. It pays to ask for the opinions of your employees and customers. — Getty Images/Tom Werner

Starting a new business, changing your marketing strategy, and hiring employees all have potential risks. Merely becoming an entrepreneur is a gamble, although the level taken among business owners varies. Some studies even suggest that risk-taking is an entrepreneurial trait. However, avoiding all risks can hinder your growth, and placing the wrong bets can result in catastrophic failures.

Consequently, most people benefit from knowing when to take a chance and when to hold off. You can reduce threats and leverage opportunities by developing a risk evaluation process. Here's how hard work and careful planning can lead to big payoffs.

Types of risks entrepreneurs face

Threats come from every direction as a business owner. For every great idea that you have, drawbacks exist. A comprehensive risk analysis of internal and external factors helps you mitigate possible downsides and prepare a contingency plan. This is key to building resilience and growing as an entrepreneur.

According to Investopedia, business owners should assess these types of risk:

  • Financial: Complete financial forecasts and monitor your finances in real time to protect your interests.
  • Technology: Understand the benefits and drawbacks of changing your tech stack to ensure a seamless rollout.
  • Strategic: Achieve your key performance indicators (KPIs) and business goals by continually reviewing your strategy.
  • Market: Demand for services and products differs according to market factors and customer behavior.
  • Reputational: Consider how a poor product rollout or disgruntled client can lead to negative press and customer sentiment.
  • Competitive: Stay aware of how your rivals are growing or changing and adjust your strategy to retain your market share.
  • Economic, environmental, and political: Understand the threats when expanding worldwide and preparing for a weather disaster or economic downturn.

[Read more: Walmart.com’s Marc Lore on When to Take the Risk, Even Without a Safety Net]

Identify and analyze the risks specific to your plan

The more you know about threats, the better you can mitigate them. Consider every angle of your idea and its impact on all business aspects, from people to processes. Write a sentence for each downside using this formula: "X may occur due to Y, causing Z." Go through each threat and examine it further. This may involve completing a cost analysis, economic research, or competitive assessment.

Also, get feedback from others to find risks you may have missed. Trusted advisors, employees, and customers may offer input at a meeting or via a survey. Be thorough here; the more you know about a potential problem, the better you'll be equipped to develop workable solutions. When you finish, you should be able to estimate the probability, severity, and frequency of the threats happening.

For every great idea that you have, drawbacks exist.

Explore ways to reduce threats

Just because your idea has a downside doesn't mean it's nonviable. If you can reduce the threats to a manageable level without increasing costs to a level greater than the opportunity, it may be worth your while. However, don't ignore the warning signs that taking risks won't pan out. It's best to focus on reducing risks with a high probability of occurrence and steepest costs, not just financial but reputational or otherwise harmful.

The Business Journals recommend thinking twice if these warning signs pop up:

  • The financial model or business case isn't sensible.
  • Your gut instinct says no, even when the pros outweigh the cons.
  • There is uncertainty about the impact on your clients.
  • The move compromises or goes against your business mission and values.
  • It will leave you resource-poor by consuming too much time or budget.

[Read more: Stripped Beauty Founder: Ask Questions and Take Risks]

Create a business case or strategy for your risk-taking move

At this point, you may feel ready to move forward. Perhaps the rewards outweigh the risks, or the threat is less than you expected. Still, developing a business case to sell your idea is smart. Add a section to your report outlining the risks, risk mitigation activities, and contingency plans. Also, have processes in place for threat monitoring. Document your adventure and use the data to verify your risk assessment's accuracy.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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