• Risk and reward: the balance that determines business success
Articles:

Risk and reward: the balance that determines business success

06 February 2019

Ricardo Teixeira, CFP® , Chief Operating Officer Wealth Advisers |

Starting a new business carries plenty of risks, but also the promise of rich returns.  If one can overcome the practical challenges and personal doubts that often accompany entrepreneurial ventures, they can be the most fulfilling undertakings of your professional career.

Every career, form of employment or business venture has risks associated with it. There is no risk-free way of earning a living. In each case, it is up to the individual to determine whether the trade-off between the likely reward and the risks is one they can accept.

This relationship between risk and reward is one of the fundamentals of wealth creation. To create wealth, you need to take risks. However, every risk is also an opportunity to grow.

Part of the true strength and courage of an entrepreneur is their ability to accept risks, and even when they experience a setback, to come back and to try again. Most successful entrepreneurs and business owners have at one stage of their lives experienced a significant setback or financial loss.

To risk is to dare – to take a decision where the outcome is uncertain, unpredictable, and uncontrollable. The stakes are high – financial wealth can either be gained or lost on the outcome of such a decision.

For a business person, this risk-evaluation process never stops. Every pitch, every job, every tender requires you to take calculated risks in order to reap the reward of financial gain.

However, every entrepreneur’s risk appetite varies. It is possible to be in business and have manageable risks. Every business person’s measure of risk is relative to their ability and appetite to stomach the possible consequences if the risk materialises.

You could be in a business, therefore, where your risks are mitigated and controllable. Other entrepreneurs have a high risk appetite, and follow a high-risk, high-reward business model.

Being in business is your primary source of earnings and hence wealth creation. The rewards that are created through your business flow through and become your income. They will determine how you live (lifestyle wealth) as well as how much money you will have to live on during your living years (lifetime wealth).

A successful business requires a strategic plan – a game plan of how you intend winning and succeeding. In preparing your strategy, you will identify risks that you are likely to encounter. Putting proactive strategies in place for how you will take advantage of these risks will be your differentiator.

While it is not advisable to get into business if you don’t have some appetite for risk and failure, this doesn’t mean you can be reckless. Some practical tips for entrepreneurs are:

  • Create a business plan before you start your business. And follow it.
  • Don’t cash in your retirement savings to fund your business.
  • Money isn’t everything. Get into business with a purpose and passion. The money will follow.
  • Be strategic and take calculated risks in growing your business.

Part of a strategic business approach is to understand the market one operates in. This means getting to know what your clients’ needs are, and then doing your utmost to deliver on these needs as effectively as possible.

Another risk associated with running a business is the funding model. It is prudent to invest your own capital, funds that you have saved and accumulated in the business, as well as using other sources of funds. One of the true skills of an entrepreneur is striking the right balance between “own” and “borrowed” capital. Cash flow is king, but it must always be sustainable.

Finally, it is worth remembering that one of the main reasons people start businesses is to create wealth for their family. For this reason, it’s worth considering the use of a trust in the ownership structure of your business to ring-fence your family wealth from business creditors.

Take independent professional advice from your accountant and financial adviser in structuring your business investments to manage risk and to ensure operational and tax efficiency.

Risk is part of life, and part of business. Understanding, and managing, the risks involved in your business are key to achieving business success.

  • Ricardo Teixeira is a Certified Financial Planner®, and Chief Operating Officer at BDO Wealth Advisers.

Read more BDO Insights