Sometimes an audience member says to me “Risk is risk. How can you divide it into wild and calculated?” So I decided to dig deeper into this. Although we have a whole field of risk management these days, it is mainly focused on large-scale companies and the organized sector. Let’s try to understand the risk from the point of view of Small Businesses.
How do we decide which types of risk are wild and which types of risk are calculated?
According to dictionary.reference.com, a calculated risk is an opportunity taken after careful estimation of the likely outcome. The site further explains the history and use of the term: “This term is used calculated in the sense of ‘planned with foresight,’ a usage from the mid-19th century. Its pairing with risk dates from World War II, when chances of losing bombers were taken into account before a bombing mission was dispatched. After the war, the term was transferred to other ventures where having the opportunity to succeed had to be weighed against the costs of failure.”
There is a difference between driving fast and driving recklessly on the highway. You have to drive fast, if you are on the road or highway, but you must not be rushed. Speed limits up to which reasonable control can be exercised should also be known. Despite the calculations behind the risk, things can still go wrong, but you won’t be completely screwed and the probability of such a thing happening would be low. Edmund H. North rightly says, “I think there is a difference between a gamble and a calculated risk.” André Malraux further explains: “Often the difference between a successful person and a failure is not that one has better skills or ideas, but the courage one has to bet on one’s ideas, take calculated risks and act.”
In simple words, the calculated risk is a risk that is within our absorption capacity and that is taken after a thorough cost-benefit analysis (due diligence). Our risk capacity depends on several factors. To assess one’s risk capacity, one should ask the following questions:
• Do I have another source of income? (Spouse’s income, investments, etc.)
• Do people depend on me? Am I supporting a family?
• What is my ability to bear losses? How long can I wait to break even?
• What is my next option/safety net if this business fails?
• Have I taken the necessary measures to minimize the risks?
• What are my contingency plans if my assumptions go wrong?
There is an interesting saying in the Punjabi language of India, Pehle saal chatti, duce saal hatti, teeje saal khatti. (Rough translation: you experiment and spend during the first year of activity; you open a store in the second and make a profit only in the third year of activity). The saying emphasizes the fact that it takes time to plan, set up, and especially break even and make a profit in business.
While calculated risk is the smartest thing to do in business, wild risk is the dumbest thing to do. Especially when it comes to our passion or the love of our life, calculated risk is the best thing you can do for yourself, your career, and indirectly even make your relationships more fulfilling. The more calculated risks you take, the easier they will become with practice, and the further you can go down the entrepreneurial path. From a practical perspective, calculated risk is difficult to define. But businessmen tend to have a stronger gut feeling and intuition (compared to employees) because they use their gut feeling (intuition) more and it develops with practice. Start with small risks, and as your intuition gets stronger, start taking bigger risks.
Don’t put everything on the line. Constantly analyze and learn from your mistakes. If possible, don’t put all your eggs in one basket and spread the risks. Take a close look at the uncontrollable factors. I remember a nice poem about driving that we can apply here. Says so
The biggest enemies on the way
Speed, Liquor and Overload.
On the path of entrepreneurship, do not make rash decisions (which become uncontrollable), do not get drunk with overconfidence and do not take risks beyond your capacity. If you forget the rules, you could be violently thrown to the side of the road. After all, entrepreneurship is not for the faint of heart.
The final question, which arises in one’s mind, is what is the right time to take a risk? When should I jump into business?
Now is the time to start planning and depending on your preparation, you can time your business launch. Get inspired by the following link.
The person who risks nothing, does nothing, has nothing, is nothing and becomes nothing. He can avoid suffering and sorrow, but he just can’t learn, feel, change, grow, love and live.”
Leo F Buscaglia