The Jim Moran Institute
for Global Entrepreneurship

Main

Services
• Consulting
• Entrepreneurial Showcase
• Mentoring Program
• Youth Initiative - Junior Achievement (JA)
• Entrepreneur Roundtables
• Tip of the Month
• Contact Us

Jim Moran Institute
• Meet Jim Moran
• The JMI Staff
• Board of Advisors
• Testimonials
• Major in Entrepreneurship

Resources


• Business Resources
• FAQs
• Related Links

Risk in a start

November 13, 2005

Q- I am thinking of going into the retail business. How much risk should I take and how can I make sure it is a worthwhile endeavor?

Congratulations on your willingness to go into business on your own. This is a big step.

Risk is one of those concepts that needs to be discussed and then discussed even more. Risk is technically defined as volatility. That is, risk is related to the way profits might go -- either up or down. However, most entrepreneurs are much more concerned with downside risk (the risk of failure). I would like for you to think of risk as the probability that you will not be successful. The higher the risk, the higher the probability that you might not make it.

Fortunately, you can control risk to make sure you are not too vulnerable. There are several ways you can control or limit your risk. First, if possible, you can start out working out of your home. Working out of your home controls risk by reducing your overhead. However, you need to make sure that this does not interfere too much with your spouse.

A second thing you can do is to limit your investment in the business. For example, you might say, "When I have to put in more than $10,000 of my own money in the business, I am going to close it down. Another way to limit risk is to say, "I will only continue in this business if I have earned a profit by the 8th quarter." The more you can put these checks on risk, the better.

I was helping one entrepreneur who kept on throwing money at a venture, thinking he could save it. He spent over $1,000,000 trying to keep the business afloat and eventually had to file for bankruptcy and lost all of his investments and his retirement. If he would have put a limit on his investment, he would have saved himself a lot of pain.

Evaluation of risk is critical. However, you need to, also, insure that your venture is going to be successful.

In terms of making it a worthwhile endeavor, there is no magic formula. However, if you see other people performing poorly in the business line you are proposing to enter, there is a good chance (a high risk) that you will not be successful. For example, buying into a yogurt franchise right now would not be a very good idea considering the surplus of juice bars out there.

Also talk to as many people as possible who work in your chosen field to discover their experiences. Your local potential competitors are not going to want to talk to you, but entrepreneurs in the same business outside this area would be more than willing to talk to you.

The final and probably most important thing to help ascertain the viability of the venture is to run some proforma (forecasted) statements. Generate some realistic proforma income sheets and balance sheets. These two forecasted statements will very clearly tell you if your endeavor stands a chance of being successful. If you do not feel comfortable in producing these statements, ask your accountant to produce them for you.

Thanks for asking such great questions.