You or your client can learn how to overcome risks in business and unlock new levels of value with these top tips.
Business owners and entrepreneurs are usually no strangers to stepping out of their comfort zones. But when it comes time to consider taking a risk, figuring out whether it will lead to business triumph or financial trouble can be challenging.
Strategic risks, or factors that can affect a company’s business goals—including product launches, market or economic fluctuations, or new competition—can represent a real threat to many businesses.
While developing a strategy to manage and mitigate risks is important for business success, new value and opportunity can be found in taking certain risks.
Why is preparing to capitalize on risky business opportunities important?
As PwC’s 2023 Global Risk Survey found, taking intelligent risk is essential to making progress, transforming and prospering in the current economic climate.
In fact, more than 60% of organizations surveyed worldwide “predominantly seek to uncover opportunities” within risks—with those in the retail, business services and energy sectors leading the way when it comes to creating value from risk.
Indeed, companies with the ability to spot opportunities and the courage to take on a reasonable amount of strategic risk may not only keep up with trends but gain a competitive advantage and boost profits (think those who were able to shift to provide the market with the technology, goods and services it needed quickly during the early days of the COVID-19 pandemic.)
It’s possible to leverage and create value from risk, but it is often best approached with care, analysis and a lens focused squarely on your business’s risk profile and goals.
Here are a few ways to prepare to seize risky opportunities:
1. Consider the decision from every angle
Exploring whether a risk will be worth exploiting begins with evaluating both the pros and cons it will have on your business.
As the Center for Management & Organization Effectiveness explains, this involves:
- Clearly setting out what you hope to achieve by taking the risk and how it will help you accomplish your business strategy
- Gathering information so that you clearly understand and can assess the risk and
- Exploring its positive and negative impact on your company or stakeholders, including where the risk comes from or the potential value it might generate.
2. Align risks with your business growth goals
When taking a risk, flexibility is important — but far from taking a leap into the unknown, your move should broadly align with your company’s core goals.
Approaching risk with an authentic, clear purpose, as PwC explains, provides a helpful guide for companies on whether a risk is an opportunity or something to avoid — and goes a long way to ensuring your entire organization understands the direction you’re trying to take.
As McKinsey notes, the amount of risk you should take on should also be considered in light of your risk profile, looking at factors like your digital capability, the competitive landscape and other global and market trends.
3. Consider the value and cost
When weighing a risky business decision, it’s important to compare it to an alternative: what might happen if you choose a different route, or remain status quo.
As the Corporate Finance Institute explains, the value of risk is the potential financial benefit a company realizes by choosing a “risk taking activity.” Opportunity cost represents the amount you potentially leave on the table by choosing one route over another. While financial costs obviously come into play, implicit factors (non-monetary), such as time, should also be considered.
To calculate opportunity cost, subtract the amount you expect to earn if you take the decision from the amount you would have earned if things stayed status quo.
Return from option not taken – Return from option taken = Opportunity cost
Taking the time to evaluate and calculate the opportunity cost of taking a risk, when compared to undertaking another project or not changing anything (in terms of potential profit, as well as other factors like customer satisfaction or even time saved) can help you determine the right course of action for your business.
4. Prepare for various outcomes
In the ideal circumstance, your decision to take a risk will pay off—but as with any venture, there is always the chance of things not going to plan.
Having strong, flexible risk management practices is one way to help both mitigate risk and take advantage of opportunities to grow. With a roadmap already in place, you can assess whether your business has the processes, people and tools to manage the risk effectively.
By establishing an invoice factoring relationship, for example, a business will know that it can quickly secure a reliable source of working capital as it pursues new opportunities, by turning near current assets — credit-worthy invoices — into cash.
Ultimately, creating value from a business risk can come down to planning and preparation. Approaching this decision with the right analysis and tools may help ensure you are well-placed to seize the next risky opportunity that comes your way.
Want to learn more about how alternative funding can help overcome risks? Contact a Liquid Capital Principal today.