Risk Assessment before Starting a Business

Last Updated by Ravinder 02-Aug-2020

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● Are you tired of 9 to 5 job?

● Do you have a business idea?

● Are you ready to become an entrepreneur?

● Are you ready to launch your startup?

If your answer to all the above questions is YES then you are at the right place.

As an entrepreneur once said “Big rewards come with big risks” but how will you feel if you can minimize those risks while keeping the rewards big?

As we have discussed in our previous blogs that how entrepreneur and startups are the backbone on any economy. Today in this blog, we are going to talk about the risks associated with startups and how you can minimize those risks.

“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion” - Jack Welch

Starting a business has never been easy, there are always many risks associated with a start-up. In the modern world, everyone wants to be an entrepreneur and start their own business but as we know more than 50% of start-up businesses fail in their initial phases. There are various reasons for the failure but a startup idea has always been about risk and reward dilemma although being prepared with a plan of risk assessment for startups is always better.

Business risk assessment plays an important role in the success and planning of your start-up business. Risks of starting a new business are high now during this global pandemic but if your risk assessment business plan is good then you have nothing to worry about. That is why an entrepreneur always needs to understand the risks they are going to face.

The risks associated with startup businesses: 

There are various risk factors in a start-up business. Let’s discuss all, one by one.

Capability assessment risk

An entrepreneur always thinks that the capability of their business is high; not saying it’s a bad thing but sometimes the business does not reach the expected capability extent of the entrepreneur and they start thinking that business is not doing well while the business is, in fact, doing good to the extent it should. Whereas in another scenario, if one thinks the capability of their business is low then the startup will not be able to reach its capability on time and at the levels it should.

Let’s take an example of an online shop, on one hand, we consider an entrepreneur who is an optimist and thinking the capability of the business is high and on the other is an entrepreneur who is more pessimist and thinking the capability is low. The optimist one will always want to make a thousand dollars every day from the start but that’s not possible for a start-up and he will see the business as a failure because it is not up to the mark he thought. Whereas the pessimist one will see everything as a win and after sometime when the business will be ready to scale up, he will just be happy about whatever he is earning while the growth potential of the business will not be in his mind.

So, the capability assessment is very important to properly scale of your business.

Design and development risk:

This is one of the most important risks that need not be overlooked. The risk that the product or service, a startup is offering is not up to the standard it is required to be. The risk that the development of the product is taking more time than anticipated or the cost of development of the product is high which will eventually result in cost inflation or low-profit margins.

These risks are capable of resulting in failure of any business. The following risk can be easily de-risked by proper management of the product design and manufacturing.

Funding risk:

The most important risk associated with a startup business is the funding risk. It is the core reason for the failure of many businesses. Many entrepreneurs depend on other sources for investment in their start-up ideas whether they are industrialists, banks, etc. but after some when the start-up is in the initial phase, the investors tend to lose the vision of success which results in no more funding from their side and at the end, the entrepreneur has to either terminate the startup or look for any other sources; both results in a negative impact on the business.

So, an entrepreneur must always keep their funders interested in their business idea and try to mitigate this risk.

Demand and supply risk:

The risk when the demand for the product rises in the market but the capability of supply and development of the product is not up to the mark which will lead to the downfall of the product as the customers will move to other products and there is a chance that customers will find something better and not come back to your product ever again.

Vice versa, if the supply of the product in the market is high and the demand is decreasing then the product will be stocking up in the market and will eventually result in the downfall of the business.

The following risk can easily be de-risked with proper marketing and research team whose sole purpose is to determine the supply and demand chain of the product.

Management risk:

Next is the management risk. It occurs when the management is not capable of managing the business. When they lack the skill set required to administrate or either grow the business. Sometimes the management lacks the experience required as in a startup; everyone is a learner and new but it can lead to devastating results.

 So a startup always needs an expert for advice or consultancy.

Product-life risk:

The risk when the product estimated life is less than anticipated. Everything comes with manufacturing and expiry date and when the date of the product expiry is not according to the estimated expiry time then the risks of the product being slashed off the market comes in and if it happens, then whatever the demand of product was, it will not matter and the customers will never trust the product again.

Economic risk:

Of all the risks, this risk is inevitable; the economy of the market will always govern the business. In the current times, when the market is down and economies of many countries are downgrading, it is not possible for start-ups to sustain in the market. Though there are some businesses that are blooming in the time being but most businesses are affected negatively rather than positively.

Competitor risk:

The risk when your competitor is selling the products or services better than you or cheaper than you. If your competitor is selling something cheaper than you, it will result in fewer sales even if your product/service is far greater than the competitors. A business start-up has to fight for its place in the market as there many competitors in any field. If the competitors are old-dated than you then most certainly they have a firm hold on the market and know how to not lose their customers to your new start-up.

Technology risk: 

The technology is always advancing in modern time and it is always a risk that the technology, a business is providing or either using becomes outdated and outsmarted by the competitors.

Operations risk:

The risk when the cost of the operations is more than planned which will certainly increase the price of the product. It is also the risk when any machinery malfunctions and the operations are interrupted. The time delay will always cost any business.

There are many other risks that govern the success of any startup business but these are the main risks that can never be ignored. An entrepreneur should always assess these risks associated with startups before starting the business. If the entrepreneur is not confident and fearful of any risks, then they should always ask an expert for advice.

These risks can be easily mitigated after proper assessment but always needed to be considered and not avoided.

We hope you liked our blog, please let us know with your valuable suggestions and feedback. If you don’t want to miss on any latest blogs, do subscribe to our free newsletter.

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