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How to Become Risk Savvy

When analysing a business risk you must consider the upside potential and the worst-case scenario

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Although I was by no means the world’s greatest law student, the fact that I could write well, was older than most of my classmates and had some real-world experience landed me one of the best jobs of anyone in my class upon graduation: working at the big firm in the big city while making the big bucks.

But that dream job soon turned sour when it dawned on me that they weren’t paying me that sweet salary for nothing. The hours were grueling and the work demanding. Before long, I was dreaming about leaving that “dream job” and starting my own law practice.

Related: Taking the Risk Out of Risky Business

But doing that was easier said than done. As anyone who has ever contemplated starting a business knows, the risks of the venture loom large. How does one leave the security of a job and paycheck and benefits for the uncertainty of a new business? The potential perils seemed too big. And then I remembered the words a wise old entrepreneur once told me:

“An entrepreneur is a person willing to take a risk with money to make money.”

Right he was – risk is part of the game. There was no way around it. Trying new ideas, opening a new location, launching a new product line – it all involves risk. So maybe the first question to ask yourself if you are thinking about starting a business is whether risk-taking is part of your DNA. Because if it is not, you will have a problem from the get-go.

That said, it’s equally true that the best entrepreneurs are risk savvy. They know that, while taking risks is inevitable, they should never be wild, crazy risks. Instead, one trait shared by great entrepreneurs is that they look to make their risks smart, calculated ones.

Risks: The good, the bad and the gut-wrenching

How can you tell the difference? After all, with great risks come great rewards, and as such, it’s sometimes hard to see the forest for the trees.

One way is viscerally – you know a big risk when you see one. It registers in your gut. In his great book “Blink,” Malcolm Gladwell posits that gut reactions are often the best reactions because your subconscious takes in all available information and registers very reliable instant responses. In other words, if you find yourself waking up in the middle of the night worried about X, it just may be true that X is the sort of risk you will want to avoid in the future.

Related: 10 Ways Entrepreneurs Think Differently

That said, and with all due respect to Gladwell, risk-savvy entrepreneurs also use their left brain as much as their right. Gut reactions are good and all, but they cannot substitute for some old-fashioned, logical analysis.

When analysing a business risk, consider:

  • The upside potential. You are taking a risk to get ahead, so you need to begin with what can go right if it works. The problem here is that this is too often where the analysis stops because the perceived results are so darned enticing that people experience brain freeze. Don’t make that mistake.
  • The worst-case scenario. One way risk-savvy entrepreneurs become risk savvy is by making mistakes. Mistakes will happen in your business, too – guaranteed. And given that, it’s your job to make sure that no single mistake will cripple your business.

Mistakes happen. The worst-case scenario happens. No one at Time Warner or AOL ever expected their merger would later be considered the worst in history – but it was, and it almost destroyed both businesses in the process.

If the risk is such that, should it fail, you will still be OK (albeit damaged), then you’re good to go. But if the downside possibility would be crippling, it’s not worth it. Period.

The last part of the equation for becoming risk savvy is that before ever taking any risks, smart entrepreneurs put in place mechanisms to make sure their exposure is never too great. That’s what you should do, too.

These include:

  • Insurance. What’s the point of insurance? It’s to reduce your risk. Not being properly insured is business malpractice.
  • Incorporation. It almost goes without saying, but any small-business person who wants to be risk savvy will have incorporated his or her business. The corporate shield protects your personal assets from business risks and mistakes.
  • Written contracts. People remember things differently. People don’t remember things at all. People remember things incorrectly on purpose. A written contract is your protection against all of these unenviable incidents.

So yes, while risks are part of business, the savvy small-business owner will work to minimise them.

This article was originally posted here on Entrepreneur.com.

Related: 9 Reasons to Quit Your Job As Soon As You Can

Company Posts

Register A Company In South Africa

With over 120 Start-up Services, Company Partners is the perfect Partner for Company, Tender and Contract compliance.

Company Partners

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Company Partners is the leading Company Registration Service Provider in South Africa, offering a One-Stop-Shop for all the Company Registration and Tender Compliance Documents.

With over 120 Start-up Services, Company Partners is the perfect Partner for Company, Tender and Contract compliance.

Established in 2006, Company Partners guarantees that the services they offer meet the standards of the best in the industry. Over 30 full-time Consultants offer services and standards of the highest quality.

Company Registration Benefits

Your Company Structure is the first consideration you need to make when you want to register a new Company at the CIPC. The preferred choice of a legal entity for most Businesses is a Pty Company.

Related: Business Model Design – Picking The Business Model That Works For You

Here’s why:

  1. You protect your personal life and assets from your business when you register a company. If one runs a business, it is necessary to operate in a safe legal structure where your business assets and risks are separated from your personal ones.
  2. You look more professional when you operate under a registered company name. If you want to obtain a large contract or a tender, it appears more professional to trade in a Pty Company capacity than in your own name.
  3. Most Suppliers and Government Departments require businesses to be registered as a Company to apply for their Tenders and Contracts.

How to Register a Company

Step 1: Complete and submit the easy online sign-up form here.

Step 2: Your dedicated Consultant will call you to assist you with any questions you may have.

Step 3: Email your ID and easy supported documents – which your Consultant will explain.

Step 4: Within a few days you will receive your brand new Company ready to use for Tenders and Contracts, via email. You can contact your Consultant at any time on a toll-free number.

Related: New Fund For Small Businesses To Be Developed

Need a Company fast? Perhaps consider a Shelf Company

Company Partners offer a variety of Shelf Company Options to suit your needs, including 2016- year Registration Number Shelf Companies. Within 24 hours after purchase, you will receive the registered Shelf Company.

You can start using your Company Registration Number and Bank Account (for income) immediately.

Each Shelf Company includes a 2016 Year Registration Number, Free Share Certificates, a Free ‘Tax Number’ and a Free ‘Official BEE Affidavit’.

You can also make use of a Nedbank Business Bank Account that’s active for your Shelf Company.

Luckily, getting your own Shelf Company is easy in terms of compliance. All that’s required is that you are at least 18 years of age, an ID document / Passport and a South African Business Address.

Why use Company Partners to Register a Company?

Fast timeframes: Your Company will be registered fast and effectively online. Your documentation is set-up in less than 24 hours, after which CIPC will process it.

Simple requirements: The only requirement for Company Registration is an ID / Passport. Everything gets done online, so you can be based anywhere in South Africa or the World.

Dedicated Consultant: Your own dedicated professional Consultant takes care of the entire process – he or she is available on his / her email and also on a toll-free number.

Professional Service: With years of experience of representing our Clients in Government, the entire process runs smoothly over the Internet. No lost documents and no frustration.

Company Partners completes all necessary applications correctly and reviews all the paperwork for you. You simply have to wait for your company documents via e-mail, confirming when you may start trading using your registration detail.

Related: Beauty Of Failure: The Art Of Embracing Rejection

After Company Registration

Any new Business needs guidance to prepare for Tenders and Contracts. After Company Partners gets you registered for your Company, Company Partners can assist you through the entire Company start-up process (optional).

That means they will ensure you have everything you need for a Tender or Contract application like a new PTY Company, BEE, Tax Clearance, VAT Registration, Logo Design, Website, Business Plan, COID, Letter of Good Standing, NHBRC, Accounting, Payroll and more.

Get Started

To start, just complete and submit the easy application form here and a friendly Consultant will contact you. Alternatively contact Company Partners toll-free on 0800 007 269 (toll-free from landlines and cell phones).

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Start-up Advice

Alan Knott-Craig Answers Your Questions On Money And Partners

From starting the right business, to managing business partners and finding your magic number, there is a secret to happiness.

Alan Knott-Craig

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If I get rich will I be happy? — JC Lately

Does money equal happiness? Mostly, yes. Research in the US shows that your happiness is proportionate to your earnings up until you earn $80 000 per annum. Thereafter, incremental income gains have a negligible effect on your happiness.

In other words: More money will make you happy as long as you’re poor. Once you break out of poverty and enter a comfortable middle-class existence, more money will not make you happier.

These are the top three for old folks:

  • I wish I’d spent more time with family.
  • I wish I’d taken more risks.
  • I wish I’d travelled more.

Therein lies the secret to happiness. Spend time with your family. Take risks. Travel.

But first, make money. Don’t do any of the above until you’re making enough money not be stressed about money.

Related: Your Questions Answered With Alan Knott-Craig

What is the magic number? — Mushti

The magic number is the amount of money you need to not worry about money ever again. If you don’t need toys like Ferraris, yachts and jets, the magic number is R130 million. Here’s the math: R130 million will earn R9,1 million in interest annually (assuming 7% interest). After tax that is R5,46 million.

Assuming you need 50% to maintain a good lifestyle, that leaves approximately R2,7 million for reinvestment, which is enough to keep your capital amount in touch with inflation for 50 years. The balance of R2,7 million (after tax) is for your living costs. In South Africa, R2,7 million will afford you a lifestyle that allows you to send your kids to a great school and university, to travel overseas a couple of times a year, and to live in a comfortable house.

Over time your living costs (and inflation) will eat into your capital amount. After 50 years you should be down to nil, assuming you earn zero other income in that time.

In 50 years, you will probably be dead. If you’re not dead, your kids will be able to support you (because they love you and they have a great university education).

I am the sole director of a company (the others still have full-time jobs and don’t want to be conflicted) and there is pro-rata shareholding based on our initial shareholder loans. However, I am putting in most of the hard work, together with one of the other actuaries. How best do I manage the director/shareholder dynamic? I obviously want to make as much progress as possible but there are times when I need the input from the others (and their responses aren’t always as quick as I would like). — Mike

If you have any perception of unfairness regarding effort/risk vs reward, deal with it NOW! You can’t do so later. The best approach is honesty. Call your partners together. Explain your thinking. Perhaps argue for 25% ‘sweat equity’ for yourself. Everyone dilutes accordingly. Ideally cut a deal whereby you have an option to pay back all their loans, plus interest, within six months, and you get 100% of equity (unless they quit their jobs and join full-time).

Equity dissent must be resolved long before the business makes money, otherwise it will never be resolved.

Related: Alan Knott-Craig’s Answers On Selling Internationally And Researching Your Idea

What do you think of WiFi in taxis?— Ntembeko

It’s a good idea, but not original. Before embarking on a start-up, you should survey the landscape for competitors. Just because there are none doesn’t mean no one has tried your idea.

It just means that everyone that tried has failed. You need to be 100% sure that you have some ‘edge’ that makes you different from everyone who came before you (and failed). Otherwise you will fail. What is your advantage that is different to everyone who came before?


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Start-up Advice

What You Need To Know About The Lean Start-up Model

The Lean Start-up philosophy was developed by Eric Ries, a Silicon Valley-based entrepreneur who also sat on venture capital advisory boards. He published The Lean Startup in 2011, igniting a movement around a new way of doing business.

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The model follows key precepts that include:

Taking untested products to market

The fact that too many start-ups begin with an idea for a product that they think people want, spending months (or even years) perfecting that product without ever testing it in the market with prospective customers.

When they fail to reach broad uptake from customers, it’s often because they never spoke to prospective customers and determined whether or not the product was interesting. The earlier you can determine customer feedback, the quicker you can adjust your model to suit market needs.

The ‘build-measure-learn’ feedback loop is a core component of lean start-up methodology

The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a start-up can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect.

Utilising an investigative development method called the ‘Five Whys’

This involves asking simple questions to study and solve problems across the business journey. When this process of measuring and learning is done correctly, it will be clear that a company is either moving the drivers of the business model or not. If not, it is a sign that it is time to pivot or make a structural course correction to test a new fundamental hypothesis about the product, strategy and engine of growth.

Lean isn’t only about spending less money

It’s also not only about failing fast and as cheaply as possible. It’s about putting a process in place, and following a methodology around product development that allows the business to course correct.

Progress in manufacturing is measured by the production of high quality goods

The unit of progress for lean start-ups is validated learning. This is a rigorous method for demonstrating progress when an entrepreneur is embedded in the soil of extreme uncertainty. Once entrepreneurs embrace validated learning, the development process can shrink substantially. When you focus on figuring the right thing to build — the thing customers want and will pay for, rather than an idea you think is good — you need not spend months waiting for a product beta launch to change the company’s direction. Instead, entrepreneurs can adapt their plans incrementally, inch by inch, minute by minute.

Source: theleanstartup.com

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