Risky Business: How to Determine What Risk to Take or Not to Take…

A RISK is determined by the fact that there’s something to lose from the repercussions of your decision and hence your actions. An element of danger maybe, with some risks much larger than others. Take the risk of taking on a new customer.

What have you got to lose? If you weighed up the pros and cons it would look something like this:

Potential Pros – new customer = increase turnover, increase profit, business growth, repeat business, increase average dollar sale on first job and subsequent jobs, may need to hire new staff, to name a few.

Potential Cons – new customer = too much work, no profit (own fault – review rates), customer complaint (own fault – improve customer service), additional time required to complete work (especially if a large job), money falls into bad debt (own fault – develop system for upfront or periodic payment), hiring additional staff, to name a few.

Would you consider this a risk work taking or not?

My opinion it’s a risk you can’t afford not to take. After completing our due diligence above, this risk is actually an opportunity, and one for the good of the business and yourself as the owner. Your decision to either take the risk or not will simply lie with the confidence you have in your decision.

That said, how can you be certain you’re making the right decision when it comes to taking risks in business? The key is to minimise the danger.

A great exercise, and one I do when assessing any risk, is to consider every possibility as a repercussion of my actions. I complete my due diligence, to include pros and cons on paper, I speak to anyone I feel could give me sound advice (my accountant, my mentors, mates in the industry – a sounding board can be an amazing eye opener to reach your own decisions) and then I ask myself “what could possibly go wrong?”. Once I’ve identified the worst possible things that could go wrong, I make a list of actions I can take to offset these negative factors. It’s like a ‘crisis strategy’ or ‘Plan B’.  The idea with ‘Plan B’ is to ensure I’m never caught unprepared because I’ve thought through any uncertainties that create unacceptable risks–risks that I cannot afford to take.

I have to be honest and say that some of my risk taking, although calculated, has included a little bit of gut instinct. A prime example is when hiring a staff member. It’s amazing how at times you just instinctively know it’s either ‘right’ or ‘wrong’.

So the question still remains, how does one determine what risk to take or not to take? 

If I have just completely baffled you, in his blog on Entrepreneur.com, Brian Tracy discusses the five different types of risk that I believe will assist to answer the question:

1. The risk that’s not yours to take.

Whether the risk belongs to your partner, your friend or your business partner, this risk is the easiest to deal with because it’s not yours to take and hence it’s not your responsibility.

2. The unnecessary risk.

Haven’t you heard the saying “sleep on it!”. Often split second decisions made with little information can be detrimental to both you and all parties involved. Take the time to think through pros and cons of every situation. A decision needs to be made either way, but a calculated risk is better taken when you enter with your eyes wide open.

3. The risk you can afford to take.

Some risks are exceptionally low with regard to failure, and in fact are heavily skewed towards massive gains and success – like the new customer example above, following up a lead, exploring a new opportunity – both actions work in your favour. It is this type of risk that you need to action immediately.

4. The risk you can’t afford to take.

This type of risk should be avoided at all cost, like gambling the entire business, the  family home and your kids (hoping you wouldn’t go that far) on a single speculation. We need to make unemotional decisions in relation to the business, hence it is imperative to review the numbers plus weigh the pros and cons to determine the risk.

5. The risk you can’t afford not to take.

These are risks that have a potential payoff that’s too significant too ignore. The better you are at evaluating the facts around each risk or opportunity, the more skilled and quicker you will become to recognize them when they cross your path.

So, are there benefits to risk taking? I believe there are.

Taking risks, calculated ones, will make you a better person. They will challenge your thinking, cement your morals/values, build your confidence, can help you face your fears that prevent you from achieving your goals and will provide that extra spark and energy to your body, mind and soul. They provide or will re-ignite the passion, the fire, the drive and motivation to allow the magic to happen.

That said, from now on whenever anyone farewells me with “take care”, I will cordially reply, “No, take risks!”.

What’s next?

  1. Join our Kick-Ass Tradies Facebook Group, for access to trade business specific conversations, tips and resources, plus a like-minded community of tradies.
  2. Book a 15-minute Game Plan Call with Andy, owner of Dr. DRiP plumbing and co-founder of Lifestyle Tradie, to clarify your priorities and get clear action steps.