The ability to evaluate a situation and know if there is a possible negative consequence is a characteristic of all animals. In fact, for animals the ability to assess risk is necessary for survival. Too often, however, people blindly want to get rich quick. Trying to get rich quick dulls your ability to properly manage risk.
This post is a continuation of a series on small businesses. View the first post How to Start a Small Business.
Consider Both the Positive and Negative Possibilities in Your Small Business Plan
When it comes to making financial decisions we are often overly optimistic.
Have you ever heard a conversation like this:
Other:“Hey, Craig, I came up with a great idea today to make a lot of money.”
Craig: “Really, what is that?”
Other: “I’m going to go out and borrow money to buy 100 T.V.s for $80 each and then I can turn around and sell them for $125 each. It’s an easy $4,500.”
Craig: “But, what if …”
Often our financial plans are built only on best case scenarios.
If I put this money in the market for a year and it gains 10%, I will be so much better off. But what if the market goes down rather than up? As an example, we need to consider the possible negative consequences when deciding if we need to buy life insurance. If a person considered only the best case scenarios, no one would buy life insurance. We know, however, that in life things can and do go wrong.
Most of us can quote the following phrases, so why do we still make the same mistakes?
If it sounds too good to be true it probably is.
The best laid plans of mice and men.
4 Reasons Why Small Business Owners Ignore Business Risk
- Pride and overconfidence: We might instinctively know that only one in 100 can make money in a certain business, but we decide that we are better than the other 99% who are doing this business.
- Greed blinds our natural survival instincts. Greed focuses only on the positive possibility while completely neglecting the potentially financially fatal consequences.
- Desperation. Ever heard the phrase, “Desperate times call for desperate measures”? I know you have. When our situation becomes more hopeless we increase the risk we are willing to take to succeed.
- Something to prove. Some people feel as though they always need to prove something. Such people take exorbitant risks with the the hope they they will make a name for themselves.
The point of this article is not that you should never take a financial risk. But instead you should be aware of the risk, aware of the likelihood of failure, and take appropriate action.
You should know before entering into any risky situation how financially fatally failure would be. Some business plans may have a small financial impact if you fail. This might be a person who spends $500 from savings to advertise a business with no overhead. Other business plans can have a devastating financial impact. This would be a person who borrows $150,000 against his house. If things go wrong, there is a lot more at stake.
Be sure you know how likely you are to fail and how likely you are to succeed.
4 Ways to Properly Evaluate Business Risk
- Find: Seek out a wise and honest person who you know will tell you the open truth – even if the truth is difficult. Find the kind of friend discussed in Proverbs:
Wounds from a friend can be trusted, but an enemy multiplies kisses. (Proverbs 27:6 NIV)
- Present: Be prepared and present your case. What you want to do. Why you think it is a good idea. What you see as the potential downsides. Why you think you can succeed at it.
- Ask: Say these words, “So do you think it is a good idea? Any suggestions or feedback?”
- Listen: Now it’s time for the hardest part – be quiet and honestly listen. Don’t be defensive. Don’t criticize the person’s words. Accept their words and personally evaluate their response only when you are sure you have fully heard what they had to say.
Plans fail for lack of counsel, but with many advisers they succeed. (Proverbs 15:22 NIV)
This post is an edited version of an article previously submitted on Christianpf.
Photo by shayan (USA).
Have you ever had any experiences where you didn’t consider the possible negative implications? What ideas do you have for avoiding making potentially financially fatal decisions?
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Craig, tremendous insight here! It probably isn’t possible to fully contain the emotional aspects like greed and pride–they’re what drive us toward ever taking chances at all so they’re probably not entirely bad.
It might be better if we can somehow harness those emotions in a positive way, by following them, but only after properly mitigating the chances we’re taking. That would be some directions along the lines of not going into debt for a business/investment, starting a business as a side business before taking the plunge full time, working a business full time but in tandem with a part time or contract job in our regular field, or having a comfortable cash cushion in place before taking any chances.
There isn’t any way to get from where we’re at to where we want to be without taking chances, so finding intelligent ways to manage the risk is a necessary of the challenge.
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