How to Calculate Risk for a Startup Business

Starting a new business or beginning your career as an entrepreneur has never been more exciting. The market is prepared for fresh entrepreneurs with countless opportunities and the startup business economy is ready to pour money in innovation and creativity.

While it is exciting and full of opportunities, it is also risky at the same time as 8 out of 10 startup businesses fail according to Forbes. But Igor Salindrija, who is working as successful entrepreneur of AskGamblers.com, believes in the power of rewards of taking calculated risks. The formula of success for Salindrija is to step outside the comfort zone and face challenges by taking calculated risks.

Risk Management in a Startup Business

Risk is common in a business, even if you calculate every number. There are two ways to manage risk; calculate risk before it occurs and post risk management. Business risks can be divided into different types given here.

Ignorable Risks – Risks that come with minor consequences and are financially cost-effective are ignorable risks. These include delaying small business deal meeting for more important business deal meeting. A flat tire of the car, which can be replaced with a substitute tire or even car, is also an ignorable risk.

Nuisance Risks – These are small risks that can lead to dangerous consequences. Nuisance risks can be fixed with a few behavioral changes including putting coffee mug on table instead of laptop and regularly checking the ink of printer.

Insurable Risks – The disastrous risks which can be insured by premium insurance companies are insurable risks. These include Property and Casualty Insurance, Directors and Officers Insurance, Error and Omissions Insurance for Lawsuit, and other insurances of the same kind.

Company Killers – A majority of the startup businesses fail when they fail to identify or manage company killer risks. The survival of your startup business primarily depends on your ability to mitigate and manage company killer risks.

 

The different types of risks involved in company killer risks are these.

  1. Market Risk

Market Risk refers to market demand of your product. There is no one formula to find out the possibility of the success of your products. In 1943, IBM predicted that there is market for five computers in the world. Only commodity is something that almost always sells. According to Steve Jobs, the success of your product can be only determined when real customers start using it.

Simply put, the market risk can be determined only after cleverly analyzing the market, finding room for products that may fail and introducing and marketing your products in cleverest manner.

  1. Competitive Risk

After evaluating market risk, the second important thing you need to look into is competitive risk. It is an obvious risk as the market already has competitors or generates it later when people start copying your ideas. Competitors also steal your trade secrets including your best employees. You need to focus on quality, price, marketing tactics and customer dealership to maintain your leadership. Make sure to avoid getting into legal disputes with your competitors.

  1. Operational Risk

When introducing your products and services, make sure that your startup business is potent to manufacture and produce highest quality products like your competitors in the market. You may need high quality machines or heavy equipment for shipping your products. You also need backup plan for operating your company in bad times. Accidental Insurance is one of the options for backup plan.

  1. Financial Risk

One of the biggest fears for entrepreneurs is of financial risk. Most often, the venture capitalists and investors do not fund high risk businesses. Even if you become successful to get sufficient money for your high-risk company, the risk is still there. Credit risk, commodity price risk, manufacture risk, exchange rate risk, asset price risk and many such risks may interfere with your net profits even when the company is up and running.

  1. People Risk

Failure to recruit the right type of people, failure to manage your employees, failure to motive or to recruit multitasking people, and many such failures define people risk. Even if you successfully recruit efficient employees on important vacancies, still you need to keep your employees motivated and loyal to your company.

  1. Regulatory and Legal Risk

From tax complications to other legal and regulatory risks, many startup businesses bankrupt due to heavy fines and penalties charged upon them. Business lawyer or consultant is the ideal solution for reducing legal and regulatory risk.

  1. Systematic Risk

Increased global fuel prices may adversely affect your supply and logistics services. Similarly, you need to reduce the market price of your products if your competitors reduce the prices of their products. Systematic risk is common when market demands or prices increase or decrease.

Risk Calculation

Here is a step by step process of risk calculation. Sometimes you may also need consultant’s advice to calculate and manage risk.

Different Ways of Identifying Risk

As you are already aware of different types of risks now, you can easily identify the possibility of a risk. Here are some more ways to identify risk.

  • Review your business plan again and again. You may also ask a business analyst to review your business plan and proposal.
  • Include every important person to brainstorm the problem areas. Important parties include financial accountant, technician, lawyer, investor, staff and every member of the board.
  • Conduct scenario analysis. It refers to analyzing future possibilities in politics, economics, legislation and operations.
  • Conduct Critical Market Research Analysis. It refers to evaluating market risk and competitor risk. You may hire a professional analyst to conduct critical market research for you.
  • System analysis refers to evaluating and breaking down your work procedures.

Explain the findings in terms of flow charts, tables and diagrams. Find out the location of risk i.e. internal, external, hybrid or third party risk. Also, make sure to find who will be affected by the dangers of risk.

Risk Analysis and Evaluation

The easiest way of evaluating and analyzing risk is to rate them on scale. You need the pyramid of chances and scale of results for evaluating a risk.

Pyramid of Chances

 

Level 1: If the risk occurs only once in the industry then it may be listed among ignorable risks. It has lower chances of affecting your business.

Level 2: If a risk occurs once in ten years then evaluate its chances in your business. This risk cannot be included among ignorable risks but you also don’t need to worry about it.

Level 3: If a risk happens once in a year then its probability ratio is 1:365. In other words, 1 company among 365 companies manage this risk every day. You need to take such risks seriously.

Level 4: If a risk occurs more than once in a year then it is a common risk and needs to be treated very seriously.

Scale of Results

The scale of results shows how your business is affected by the results of a risk you failed to manage.

Level 4: It shows severe consequences. For startup businesses, any loss above $50,000 and above falls in this category.

Level 3: High risk represents level 3 on the scale. Generally, a loss between $10,000 and $50,000 is calculated at high risk.

Level 2: Moderate financial losses are defined on level 2 of this scale. Moderate losses range from $1000 to $10,000 for startup businesses.

Level 1: Low financial losses fall at this level. These include financial losses lower than $1000 for startup businesses.

Risk Rate Calculation

Pyramid of Chances x Scale of Results = Risk Rating

For example, a rare risk on level 2 of Pyramid of chances has severe consequences and falls on 4th level of Scale of Results then it is a high risk i.e. 2 x 4 = 8. Here is a general idea for rating risks.

Risk evaluation should also include your control on the risk, your business activity, your business potential to bear the loss, other considerable losses to your business, and benefits or opportunities associated with the risk.

After evaluating all risks associated with your business, rank them in priority order.

Risk Treatment

Proper risk treatment is more important than identifying the risk because failed treatment may fail your startup business even if you identified the risk on time.

  • The first step is to avoid the risk. If it is a low risk and you have bigger problems to deal with then you can avoid the risk for some time but make sure to treat it later.
  • The second step is to reduce risk by quality controlled processing, debt management, creative marketing, staff training, regular maintenance, and other solutions depending on the nature of risk. The impact of risk can also be reduced by minimizing its exposure using your public relations and utilizing off-site data.
  • You can also transfer or share the risk by choosing options like insurance, partnership, outsourcing and joint ventures.

Review Risk Management Plan

Finally, review your risk management plan and make the required changes to avoid risk management errors in future.

Many companies offer outsourced risk management services at affordable costs. Taking risk management advice from relevant advisors and consultants is also one of the solutions to make your startup business risk-free.