Identify: Is Franchising Right for You?

Business Ownership: Risks vs Reward

05-10-2021 by Sarah Petersen
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Owning your own business always comes with an element of risk. While you can take steps to minimize that risk, such as buying a franchise instead of starting from scratch, you can’t completely eliminate it. Let’s explore the various risks of starting a business and the rewards that make those risks worth it. 

What Is Business Risk?

Business risk refers to a business’s exposure to factors that could lower profits. To be a business risk, something has to have the potential to get in the way of a company’s financial goals. 

 

Business risk can be either internal, such as decisions made by leadership, or external. The fact that external risks exist is why it is impossible to completely eliminate risks. That said, you can still reduce the business risks you are exposed to. 

Types of Business Risk

Because of the wide variety of business risks that can occur, experts classify them into several different types. 

Compliance Risk

Compliance risk occurs mostly in highly regulated industries. It refers to compliance with industry laws, regulations, or standards. 

Operational Risk

Operational risk comes from inside the business. It is particularly common when the company doesn’t perform well in its day-to-day operations. 

Reputational Risk

Reputational risk occurs when something ruins or damages the company’s reputation. This type of risk can arise from other business risks or from another factor. 

Strategic Risk

This is the risk associated with a business not following its plan or business model. The risk occurs because that plan or overall strategy becomes less effective without compliance. That, in turn, can make it harder for the business to reach its financial goals. 

Risk Management Strategies

You can’t completely eliminate the risks of starting a business, but you can reduce them. The following strategies are all methods to do so: 

Include Risks in Your Business Plan

Start by acknowledging that these risks exist. This means including them in your business plan, along with actions you will take to minimize them. Your business plan should always incorporate a strategy to deal with or reduce the effects of any risk while it is still minor. 

Prioritize the Risks

As you plan on how to deal with the risks, you will likely come up with several. To save yourself the effort, prioritize these into categories based on how likely they are to occur. 

 

Focus on creating plans to deal with the risks most likely to occur first. Then, move on to creating strategies for the other risks in order of likelihood. But you should also keep the potential damage in mind. 

 

A risk that has a high potential to result in financial damage should be the priority, even if it is not likely to occur. This helps you protect the financial future of your business. 

Document the Risks When They Occur

If you have to deal with business risk, document the process that you use to do so, along with how successful it is. Include notes on potential improvements while the incident is still fresh in your mind. Remember, business risks usually repeat themselves. 

 

 

Woman teaches business students about business risks and how to mitigate them.

Conduct Quality Assurance

Reputational risk is one of the risk types. The best way to reduce this risk is by having a quality assurance plan. The idea is that by making sure that your products are of high quality and as advertised, customers should be happy. 

 

Having a quality assurance program can also help you with compliance risk, depending on your industry. 

Get Insurance

Business insurance is an investment in your company’s future, and it helps reduce the risks of starting a business. The type of insurance you get will depend on the type of risk in question. Some options include completed operations, professional, disability, and life insurance. 

Limit Your Liability

Another important factor in managing risk is to ensure that risks that could affect your business do not affect you personally. With this strategy, you want to avoid operating as a sole proprietor. Instead, change your business structure to a limited liability company (LLC) or corporation. With either of those structures, you will not be personally responsible for any liabilities or debts of your company. 

Limit Customers With High Risk

Unfortunately, some customers will come with a higher risk than others. Depending on your company, you may want to limit the services or products you offer to these customers. Or you set different requirements for them, such as requiring customers with poor credit to pay ahead of time. 

Don’t Grow Too Quickly

Avoid growing your business too quickly. If you do, you may not have enough time to train employees to keep up or be able to scale up your products or services. This can lead to a poor reputation and lost income. 

Consider a Franchise

Opening a franchise instead of starting a business from scratch reduces your risk in several ways. To start, you get to take advantage of the brand recognition of a larger company, saving you from reputational risk. You also get resources such as training and promotional materials, helping prevent internal risks. 

And Now for the Rewards

While you should be aware of the various business risks, most business owners agree that they are well worth the rewards. That is why people continue to open businesses. 

Personal Freedom

One of the biggest rewards of starting a business is that you will have personal freedom. You can make all of the decisions, from which customers to work with to the hours you work. You can decide when to take vacation days. Most importantly, you can pursue your passion if you can turn it into a business. 

Financial Opportunity

Being a business owner also comes with amazing financial opportunities. Your company will always have room to grow in the future if it does well, and most of the rewards from company growth will go right into your wallet. While it takes hard work to be successful, you have the potential to increase your income by starting a business. 

Ownership Rewards

You also get the rewards of being a business owner. This lets you create a place for yourself in your community if you don’t already have one. It gives you a financial opportunity to pass on to your children or sell in the future. You also get job satisfaction. 

There’s No Such Thing As a Sure Thing

Before you start any business, remember that there is no such thing as a sure thing. There will always be business risks, and even major corporations with rich histories and multi-billion-dollar incomes face risks. The important part is that the potential rewards can outweigh the risks for many entrepreneurs. 



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