How to Take Smart Business Risks

From Henry Ford to Steve Jobs, history is full of entrepreneurs who took risks and turned their businesses into mega-successes. However, for every iPod, there is a WebTV — a promising idea that never takes off.

As a small business owner, you have to be willing to take risks if you want to expand. But you need to carefully consider whether your big idea is a smart risk or a reckless move that could cost you your company. Ask yourself these questions to help you determine whether your idea is a risk worth taking.

3 Questions to Help Assess Business Risk

1. Does my idea fit in the context of my current business?

An idea can be great, but it may be destined to flop if it isn’t compatible with your current business offerings.

Consider failed brand extensions such Colgate’s idea to sell dinner entrees in the early ’80s or the short-lived Hooters airline that was grounded after only three years. On their own, selling frozen meals and air travel are not bad ideas, but they didn’t jibe with consumer expectations for those brands. And in a crowded marketplace, seemingly random business expansions are rarely smart moves.

2. Does my idea fill a want or need?

Market research should, of course, precede any new initiative. A product or service for which there is no demand may be destined to fail. More specifically, consider these questions to determine whether it makes sense to take a risk by expanding your business base:

  • Are there competitors offering the same product or service?
  • Do these competitors have a weakness that you can exploit?
  • Is there an underserved customer base or geographic region that could benefit from your proposed product or service?

3. Will my business survive if the risk doesn’t pay off?

Finally, look at your financials. If you are not a numbers person, hire someone else to help you estimate the anticipated pay-off, as well as how much you stand to lose if your idea flops. In the event that a loss could put you out of business, consider brainstorming for another great idea.

Focus on building capital and revisit the numbers in the future, but don’t let your impatience put a stable business in jeopardy. Remember: even “can’t-lose” ideas sometimes fail.

Entrepreneurs that want to grow their business need to take risks, and unfortunately, there is no magic formula to know when to make a gutsy move and when to bide your time. However, answering these questions can help you be smart about taking business risks.

Maryalene LaPonsie has been writing professionally for more than a decade on topics including education, insurance and personal finance. She holds a Bachelor’s Degree in Political Science from Western Michigan University.

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