Risk is a possibility of the loss of something valuable. It can be many things like a threat you don’t understand, uncertainty about your market, or a disruption to your core business. Risk can be qualitative: your plans are incomplete and therefore you don’t see dangers where you should. Or risks can be quantitative where your financial performance is substantially different than your estimates. It’s vital that you risk assess your plans and make adjustments as necessary. Consider:
Did you base your plan on facts or are you just guessing?
There is a big difference between risk taking and gambling. In risk taking, you have considered the potential consequences of your choices and can anticipate contingency actions. In gambling, you are guessing and don’t have real control of the potential outcome. If you want to build a business and take risks, use data to drive your decisions. Don’t guess if you don’t have to and these days there are a significant number of tools available to help you get data. If you want to gamble, why try to start a company when you can just go to Vegas.
Are you counting on things to happen that you don’t control?
Make a list of key assumptions embedded within your plan and divide them into 2 categories: things you control (hiring, engineering, timing) and things you don’t (economy, competition, regulation). Make sure that you have as much control as possible on the key assumptions of your business, before you invest your hard earned cash. Dream but be realistic too.
How long can you survive with the cash you have?
If it’s a short time, you are in trouble. Liquidity risk is the number one reason start-ups fail. Get ahead of this risk by making sure your estimates are sound, your controls are solid and you have alternative sources of liquidity, should you ever need it.
Managing risk is a fundamental part of developing a good business plan.