This article was updated on Oct. 16, 2018.
Every business involves risk. Taking risks is crucial for businesses to grow, whether they are expanding into new markets, opening new locations, reaching new customers or extending product lines. Sometimes, doing nothing is a risk in itself.
To determine the opportune time to take a risk, you should weigh the potential costs of inaction with the potential benefits. Here are the top five tips for smart risk taking for small businesses.
1. Determine Goals and Risks
First, identify your goals. For example, do you want to expand your customer base or better serve existing customers? Since more heads are better than one, identify key employees to participate in a brainstorming session to outline goals and identify potential risks. Consult with external advisers if necessary.
2. Identify What You Can Afford to Lose
Don't "bet the farm" and invest all your money on something you think might be successful. Ensure you have a buffer in case things go wrong, such as enough money to cover expenses through six months of reduced revenue. Smart risk taking for small businesses can mean taking small risks to test the water and examining results before taking a plunge with a bigger investment.
3. Plan in Detail
A comprehensive plan that covers each step of the process is essential. Things to consider include funding the venture, ensuring the necessary supply of materials, training staff and marketing your efforts. Don't rush the planning stage, it's essential for lowering risk and giving you a better chance of success.
4. Do It!
Once all this is in place, you are ready to go ahead. As the new effort unfolds, keep careful watch to see if it's meeting your expectations. It's highly likely that some fine-tuning may be needed, but if you've paid careful attention to the previous three steps, your careful planning can help you identify corrective measures. Trial and error is an essential part of risk taking.
5. Review Your Process
Whether the risk you took produced the desired results or not, there will be something to learn from the outcome. You might learn that taking smaller risks first is a good idea for your company. Discuss the process with your original brainstorming team, as they're likely the same people you will rely on when making future business-related decisions.
Business owners who take risks are more likely to experience revenue growth and be more optimistic about the future, yet 68 percent of small business owners either never or only occasionally take a risk, according to Accounting Web. Risk taking can be good for your business when carefully planned and executed at the right time.