Sometimes an audience member tells me “Risk is risk. How can you divide it into wild and calculated?” So I decided to delve deeper into this. Though we have a complete field of risk management these days but it primarily focuses on large scale businesses and organized sector. Let’s try to understand risk from Small Business point of view.
How do we decide, what types of risk are wild and what types of risk are calculated?
According to dictionary.reference.com, a calculated risk is a chance taken after careful estimation of the probable outcome. The site further explains the history and usage of the term, “This term uses calculated in the sense of “planned with forethought,” a usage from the mid-1800s. Its pairing with risk dates from World War II, when the chances for losing bombers were taken into account before a bombing mission was sent out. After the war the term was transferred to other undertakings where taking a chance to succeed had to be weighed against the costs of failure.”
There is a difference between driving fast and driving rash on the road. One has to drive fast, if one is on the highway or expressway, but one should not be rash. One should also know the speed limits upto which one is able to exercise reasonable control. In spite of calculations behind the risk things can still go wrong but you will not be completely ruined and the probability of such a thing happening would be low. Edmund H. North rightly says, “I think there is a difference between a gamble and a calculated risk.” Andre Malraux further elaborates, “Often the difference between a successful person and a failure is not one has better abilities or ideas but the courage that one has to bet on one’s ideas, to take calculated risk and to act.”
In simple words, calculated risk is a risk which is within our capacity to absorb and which is taken after thorough cost benefit analysis (due diligence). Our capacity for risk is dependent upon several factors. To assess one’s risk capacity, one needs to ask the following questions to oneself:-
• Do I have another source of income? (Spouse income, investments etc)
• Are people dependent upon me? Am I supporting a family?
• What is my loss bearing capacity? For how long I can wait for break even?
• What is my next option / safety net if this business fails?
• Have I taken necessary steps to minimize the risks?
• What are my contingency plans if my assumption/s go wrong?
There is an interesting saying in Punjabi language of India, Pehle saal chatti, duje saal hatti, teeje saal khatti. (Approximate translation: you experiment and spend during the first year of business; set up shop in the second, and earn profit only in the third year of business). The saying emphasizes on the fact that it takes time to plan, set up and specially break even and make profits in business.
While calculated risk is the smartest thing to do in business, wild risk is the dumbest thing to do. Especially when it comes to our passion or the love of our life, calculated risk is the best thing you can do to yourself, your career and indirectly even making your relationships more fulfilled. The more you take calculated risks, the easier they become with practice and the further you can go in entrepreneurship journey. From the practical perspective, it’s difficult to define calculated risk. But businessmen tend to have stronger hunch and gut feeling (compared to employees) because they use their hunch (intuition) more and it develops with practice. Start with small risks and as your intuition becomes stronger, start taking bigger risks.
Do not put everything at stake. Constantly analyze and learn from your mistakes. If possible do not put all your eggs in one basket and spread the risks. Take a close look at the uncontrollable factors. I remember a nice poem on driving which we can apply here. It goes like this
Biggest enemies on the road
Speed, Liquor and Overload.
On the road of entrepreneurship, don’t take rash decisions (which become uncontrollable), don’t get drunk with overconfidence and do not take risks beyond your capacity. If you forget the rules, you might be violently thrown at the wayside. After all entrepreneurship is not for the chicken-hearted.
The final question, which arises in one’s mind is what is the right time to take risk? When should I jump into business?
Now is the time to start planning, and depending on your preparedness, you can schedule the launch of your business. Get some inspiration from the link below.
The person who risks nothing, does nothing, has nothing, is nothing, and becomes nothing. He may avoid suffering and sorrow, but he simply cannot learn and feel and change and grow and love and live.”
Leo F. Buscaglia