Most entrepreneurs are risk takers. After all, they are the ones who start businesses fully understanding the long odds of making it go. They invest their savings along with borrowed funds from family and friends, believing they will pay it all back once the business gets going.
Fortunately, they also tend to be optimists who are passionate about their product or service and are willing to persevere through the tough times. That alone can turn a bad risk into a good risk.
In all businesses, a certain amount of risk taking is necessary. To quote Mark Zuckerberg, “The biggest risk is not taking any risk. In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” Ray Kroc was more blunt saying, “If you are not a risk taker, you should get the hell out of business.”
So, the question is what risks are acceptable and what risks are to be avoided? It depends on the type of risk, the scope of the exposure, and the likelihood of an occurrence.
For this article, I would like to focus on five risks that are not discussed nearly enough. In our 30 years in business, we have experienced or seen all of these, often with serious consequences. In no particular order, they are:
The Risk of the BIG Client
We lost our biggest client twice in three years. The first was during the recession that began in 2008 when a client accounting for 40 percent of our revenue simply stopped spending on the services we provided. Like many other corporations, they hunkered down and held onto their cash to weather the economic downturn. We accepted this bad risk, even discussing what we should do to minimize it, but reacted too slowly.
Since the private sector was slow during that time, we focused on the public sector, in which we had considerable experience. A major federal agency became our new single largest client. Then, in 2013, the Budget Sequestration was enacted, and this agency lost its entire budget in the area we serviced. While we weathered the storm again, hundreds of small government contracting firms went out of business, resulting in thousands of jobs lost.
The Risk of Client Bankruptcy
This has happened to us three times involving locally based companies. The first one was a large client we knew was financially unstable. We breathed a sigh of relief when we got paid for a sizable project several weeks before they declared bankruptcy. Much to our surprise, however, the bankruptcy trustee required us to return all of the money, including money we paid to subcontractors who worked for us on the project. That was an expensive lesson in bad risk. We were better prepared when the two other clients declared bankruptcy, and the risk was reduced.
The Risk of an Unsafe Workforce
Many more companies are now considering a business’s safety record as part of their qualification criteria for approval as a vendor. They request your experience modification factor as proof of claims experience. An experience modification factor adjusts an employer’s insurance premium to reflect the difference between the employer’s loss experience and the average experience that is expected for its classification(s) and size. If a company’s experience exceeds the average for the industry, it may be barred from doing work for the client company. Not understanding your safety experience and how it can impact future work opportunities is a bad risk.
The Risk of Overly Trusting an Employee
The more sensational cases make the evening news—the accountant who embezzles from the employer by diverting money to fictitious companies, or the manager who uses company equipment and materials for his side business, finally get caught and a long legal battle begins. More often, however, the company discovers the unethical practice and fires the employee without recovering damages. What the two often have in common is that a long-term loyal employee was involved. And, because they were trusted, little or no oversight was in place. In today’s electronic fund transfer environment, not having a series of checks and balances in place is a bad risk.
The Risk of High Employee Turnover
The cost of employee turnover can be staggering and is often underestimated by business owners. By most estimates, turning over an entry-level person costs 30 to 50 percent of that person’s annual salary. Mid-level or specialized position turnover can cost 100 to 150 percent of annual salary. Although some turnover is inevitable, minimizing it through solid recruiting and hiring practices as well as creating an environment of professional fulfillment and career advancement will positively impact the bottom line.
My experience tells me that most business owners know many of the vulnerabilities in their companies. Spending some time researching the many resources available in books and online may help identifying some that are less obvious. Taking calculated risks is part of running any business. Make sure to minimize them wherever you can, and don’t ever bet the farm.
On November 19, 2015, HEMP will welcome Apple co-founder (and well-known introverted entrepreneur) Steve Wozniak to Helzberg Hall at the Kauffman Center for the Performing Arts. He’ll be the featured speaker at an evening celebration of HEMP’s 20 years in Kansas City. Individual tickets go on sale Sept. 15. Details about the event are available at www.HEMPkc.org or by calling (816) 471-HEMP.