Risk-taking is a part of entrepreneurial life. Business owners must know when to seek loans when to expand, when to risk a steady salary in favor of self-employment and how to judge the potential benefits of taking a risk. Entrepreneurs have to have a risk-taking spirit because not taking risks can kill a business before it gets off the ground. But they have to balance that impulse; excessive risk-taking can destroy a business and its owner’s credit, finances and personal life.
Examples of Risks
Almost every business decision requires some degree of risk-taking. When an entrepreneur makes the decision to leave her paid job and start her own company, for example, she’s risking her financial health. Expanding a business to a second store or another country carries the risk of failure and lost profits. Some entrepreneurs opt to leave school to focus on their businesses full time, but if the business fails, the business owner will be left without an education and may not have the finances to go back to school.
Benefits of Risks
A willingness to take risks can give an entrepreneur a competitive edge. For example, opening a second shop where other business owners are afraid to open one could pay off with a loyal customer base. Taking out a loan could give the business owner the necessary startup capital needed to fund his business.
Business risks can move a business forward. They can gain the owner a reputation as someone who knows how to make good decisions and accurate business assessments. Entrepreneurs with a well-informed risk-taking spirit might see opportunities where others don’t and might be able to spot trends well before the market is saturated.
Drawbacks of Risks
The obvious drawback of a risk is a failure that costs something — money, time with family, credit, perhaps even the business. Failure of this sort can raise questions about whether the business owner can accurately assess risk. Business owners who take risks recklessly may lose the trust of their employees and customers. They may also overestimate their businesses’ potential for success, resulting in severe disappointment and serious financial losses.
Good planning and meticulous financial management can help an entrepreneur determine which risks are sound and which are not. When necessary, business owners should hire experts to help them make decisions. An attorney, for example, can advise about the legal risks of business decisions. An accountant can help project potential profits and losses, and industry experts can advise about trends in the field. Business owners are more likely to fail when they don’t have enough information or take risks without first considering all possible alternatives. They should surround themselves with trustworthy people and never make a business decision purely on a whim.