Starting a business involves some degree of risk – and you’ll find yourself in plenty more potentially risky situations as your business grows and develops. But how do you know if a risk is worth it? When should you take a step back, and when should you push forward with something that could be risky? The secret to making good business decisions lies in calculated risk-taking. Here’s everything you need to know about how to calculate risk.
What is a calculated risk?
A calculated risk is a decision that’s made after the pros and cons of taking a particular action have been carefully evaluated. Taking a calculated risk doesn’t mean being reckless; instead, it implies making informed decisions based on a thorough understanding of the situation. This often involves gathering relevant information, considering possible outcomes, and weighing the potential rewards against the potential negative consequences.
For example, if you’re an entrepreneur and want to launch a new product into the market, you wouldn’t just blaze ahead and do it without any research. Taking a calculated risk would involve conducting thorough market research, understanding customer needs, and estimating potential profits. It’s still a risk – launching a new product always involves some level of risk – but you’ve made a decision based on the competition, market demand and potential profit.
Similarly, a company looking to expand its operations into a new market wouldn’t just set up shop in a country they don’t know anything about. They would first analyse the demographics, understand the demand for their product or service in that region, analyse the competition, and get to grips with any regulations in that market. Then, they’d be armed with all the facts to make a more informed decision about whether it’s a worthwhile risk to take.
Why is risk management important for businesses?
Risk management is crucial for businesses as it helps identify, assess, and mitigate potential threats. That means you can make more informed decisions that are more likely to result in success rather than failure.
Risk management allows you to identify possible problems, figure out how likely they are to happen, and put plans in place to deal with them. That way, you can protect your money, keep things running smoothly, and be ready for anything that might be thrown your way.
Risk management strategies
From setting up new businesses to expanding or launching new products, businesses need to take risks. The important thing is knowing how to calculate risk, to make sure that it’s one that makes sense for your business to take.
Entrepreneur and Dragons’ Den panellist Peter Jones believes that persevering in business means taking risks – but he warns against taking them without careful consideration first. In his BBC Maestro course, Toolkit for Business Success, he says:
“There is a very fine line between perseverance and obstinance, and you continue at your peril if you fall on the wrong side of that line. Risk must always be highly calculated. Never risk it all.”
Steven Bartlett, host of the Diary of a CEO podcast, and the latest Dragon to join Peter in the Den agrees. In his course, The 16 Steps to Start and Scale a Multi-Million-Pound Business, he says:
“You have to be practical. I am never going to advise you to take a risk which is irresponsible, like something which would compromise your mortgage. You have to find a solution which fits your situation.”
So, then, how do you take calculated risks?
1. Understand how much risk is too much
It’s important to get a good handle on your own risk appetite – that is, the level of risk a business is willing to accept or tolerate in pursuit of its objectives before it becomes detrimental. Start by asking yourself questions like:
- What level of financial loss can you tolerate without a significant impact?
- What are the most important things for the business right now – and does this risk impact that?
- How well-equipped are we to deal with tough situations or unexpected events?
- What are the consequences if things don’t go to plan?
There’s no right or wrong when it comes to risk appetite. It all comes down to what your business needs, and whether now is the right time to take a risk.
2. Risk-reward calculation
A risk-reward calculation can help you to work out whether a potential risk is worth it for your business. It involves weighing up the benefits of an opportunity against the potential drawbacks to understand whether it’s a worthwhile move. You should:
- Estimate the potential returns on the opportunity
- Assess the potential losses that may occur
- Estimate the likelihood of positive and negative outcomes
- Calculate the expected value, by multiplying the potential reward by its probability
- Calculate the potential risk by multiplying the potential risk by its probability
- Compare the results – if the expected reward outweighs the expected risk, it may be a good opportunity for your business.
3. Create a risk management plan
If the opportunity looks like it could work out well for you, it’s still important to create a plan of what to do if it all goes wrong. You should develop a plan for managing and mitigating the potential risks. This plan should include things like:
- An analysis of the potential risks, including both internal and external factors
- An evaluation of the probability of each risk – as well as its potential impact
- Strategies for mitigating or reducing both the likelihood and impact of risks, which could include things like process improvements or even redundancy measures
- Contingency planning: an outline for specific actions to be taken if anything goes wrong to minimise disruption
You may also want to think about alternatives. Are there less risky approaches that still align with your goals? Compare the potential risks and rewards of different options before making a decision.
Build your business acumen
Taking risks is necessary in business – but they should be calculated risks. That means leaving nothing to chance. Instead, you should always do a thorough analysis that weighs up potential gains against possible losses. This will allow you to make more informed decisions, taking risks where necessary to drive your business forward, while leaving anything too risky behind.
Want to find out more about building a successful business? Learn from the very best with Peter Jones and Steven Bartlett’s BBC Maestro courses.
