Entrepreneurship is a game of risk and reward, and finding the right balance between them is crucial for the success of any business. According to a study by the Statistic Brain Research Institute, 50% of startups fail within the first five years. To avoid becoming part of this statistic, take the time to evaluate the risks and rewards of your business decisions.
One way to mitigate risks, maximize rewards, and avoid catastrophic failure is by following a four-phase risk evaluation process. This process can help you make informed decisions that consider the impact on your business in four crucial areas:
PHASE 1: FINANCIAL IMPACT
The first phase is to evaluate the potential impact of a decision on your business’ revenue, profit, margin, cash flow, taxes, and capital investments. These factors are crucial to the success of any business, and you should evaluate the potential impact on your financials before making any decision. For example, investing in a new product line may increase revenue, but it may also increase capital investments and taxes. It is essential to weigh the pros and cons before making any decision.
PHASE 2: REPUTATIONAL IMPACT
The second phase involves evaluating the potential impact of a decision on your business’ honesty, integrity, relationships, and legacy. Prioritize your reputation and maintain a positive relationship with your customers and partners. A single mistake can damage your business’ reputation, leading to the loss of loyal customers and partnerships. Evaluating the potential impact on reputation before making any decision is crucial.
PHASE 3: OPERATIONAL IMPACT
The third phase involves evaluating the potential impact of a decision on your business’ operations, including factors such as flow, fulfillment, cycle times, and the ability to identify bottlenecks. Evaluate the potential impact of your decision on the overall organizational flow. For example, investing in new technology may improve cycle times, but it may also increase bottlenecks. Be sure to evaluate the impact on the overall flow of operations.
PHASE 4: LEADERSHIP IMPACT
The fourth phase involves evaluating the potential impact of a decision on your business’ leadership and mentorship, including factors such as communication, honesty, integrity, and relationships. As an entrepreneur, prioritize leadership and maintain a positive relationship with your team members. A single mistake can damage the team’s morale, leading to a loss of productivity and efficiency. Remember to evaluate the potential impact on leadership before making any decision.
By evaluating decisions through these four lenses, you can ensure that one decision doesn’t create four new problems. For example, investing in a new product line may increase revenue, but it could also increase taxes, operational bottlenecks, and team stress.
Entrepreneurship is a game of risk and reward. However, the balance between the two is crucial, and this risk-evaluation process can help find that balance. Remember, there are two ways to learn: making mistakes yourself or learning from others who have already made those mistakes and found solutions. By choosing the latter, you can work toward consistent growth and compounding profits for your business.
Stephen Scoggins is the founder and CEO of Scoggins International Inc.