3 Risk Tolerance Questions You Need to Answer Before You Start
Do you think that entrepreneurship as a profession didn’t bring risk to you? Are you an entrepreneur who doesn’t want to take any risks when starting this profession? If there is a risk, how much risk tolerance do you have?
If you are already an entrepreneur, I think you are not a person who doesn’t take a risk because you already have taken some risks when you decide to start your company.
Entrepreneurship is closely related to risks and risk-taking from your side as an entrepreneur. You cannot become an entrepreneur without some risks that you must take.
Why there is a risk for entrepreneurial ventures?
You invest the money you have in your pocket. But, if you don’t know if it will bring you more or the same amount of invested money in the future, you are in trouble. That’s the first initial risk that you as an entrepreneur take on yourself and, in most cases, on your family because you must short their need’s satisfaction in exchange for the required financing of your company.
You’ll never be 100% sure about the future of your business. Also, you’ll never know with 100% precision how successful will be your company or how much money you’ll earn in the first, second, or third year. Because of that, there will always be risks in entrepreneurial ventures that you want to start.
Each potential or future entrepreneur needs to answer this question before they decide to leave a current job and become an entrepreneur: Is it worth starting a company compared with the future if you didn’t take this step? In many cases, you will relate this risk to your risk tolerance and fear.
Risk Tolerance Question #1: Can your current potential provide surviving?
In most cases, each company’s early startup stage is based on the entrepreneurial potential to bring that business to life. You’ll need to invest your time, money, knowledge, and skills into the future of your business.
You can’t start a business without your commitment to it. That commitment will need your time. You can’t start a business without money because you’ll need to provide all requirements for normal business operations in the future, such as an office, equipment, raw materials, etc. Also, you can’t start a company if you don’t have enough knowledge about the industry of your new business, the market where it will operate, or products and services that it will offer to the market. You’ll also need different skills that are much more than the skills required if you have corporate work. You’ll need to have negotiation skills, analytical skills, sales skills, networking skills, etc.
How much more you have to invest, there will be more risk for you as a potential entrepreneur. If there is more risk, more critical will become your risk tolerance for the success of your business.
Questions you need to answer:
- How much money do you have, or can you find to finance your company?
- How much time can you invest in building your company?
- Do you have enough skills and knowledge to start such a company?
The real example of the entrepreneurial nightmare and risk tolerance
I know an entrepreneur who left a large corporate work with a solid salary ($7.000 monthly) and started his own company. He didn’t expect to earn such a salary, but he also didn’t expect the new company to eat his cash in the first three months.
In such a way, an entrepreneurial excitement quickly becomes an entrepreneurial nightmare. Why did this happen in most of the cases?
First, he didn’t accurately scan and analyze his possibilities to start a business. He has money, but the startup process costs more than his predictions. Second, he didn’t make a proper sales prediction. In the startup stages, sales and cash flow are the most important things for small businesses. If it doesn’t have sales, he must invest his own money to survive this stage of his newly created company.
Case Recapitulation
If I recapitulate the example of this entrepreneur, we can tell that:
- He invests his time with a significant commitment to transfer his business idea into a real company.
- He invests his money in the new entrepreneurial venture, but he doesn’t realize that it will not be enough because of the lack of proper sales forecasting for the future. And money becomes the biggest problem for the future of his business success.
- He knows the business in general.
- He hasn’t enough skills in planning, managing, and finances. This lack of skills brings problems after three months of operations. He used aggressive marketing campaigns in the first month after startup but didn’t have a proper system to measure the results of those campaigns. In such a way, he spent too much money on advertising without real results for his company.
Risk Tolerance Question #2: How much you can earn with your business?
As an entrepreneur, you must make predictions about the next five to ten years. Especially about how much you can earn from your company. It is not the whole income from the company, but how much will remain you after you pay all expenses and taxes.
For example, your sales in the first year will be $400.000. After paying expenses and taxes, you have only $50.000. You predict that your sales will increase with a 10% annual rate with the same percent of expenditures and taxes after ten years you can earn $647.500.
Risk Tolerance Question #3: How much can you earn if you stay at your current job?
When you know how much you can earn for ten years if you start your company, you must compare that sum with the sum you can earn if you stay at your current job.
Let’s say that you have an annual salary of $50.000 with all benefits you will earn. That is $500.000 for ten years.
Now, what do you think is it worth starting a company and leaving a current job to earn $147.500 more for ten years?
But, There is Much More
Until now, we talk about any possible risks that exist for you as a would-be entrepreneur or potential entrepreneur. In the end, we finally come up with some concrete numbers about possible earnings for you as an entrepreneur and the potential of your current earnings for the next 10 years.
The calculation was that you can earn $147.500 more if you start your own business. This result leads to a logical conclusion for you to start a business because you will earn more money when you start a business and at the same time you will be your own boss.
Risk Calculation: Is it the same as the corporate job?
Before we continue with the calculations, I would like to make some comparisons between your current job and your future activities as an entrepreneur.
You Don’t Have Supply Department
When you work for some company everything that you need from paper and pencils to the toilet paper you will receive from a supply department. There are people whose job is to make the best possible working conditions for you. However, in your own business, especially at the startup levels you are the only person that must provide everything that your business will need for normal everyday operations. Because of that if you plan that you will work on innovative things in your business, forget it. You will need to add an additional hour daily for supplying your business with all necessary things.
Nobody Will Prepare You Coffee
When I was working for the corporation every morning and noon, I have received a coffee from colleagues whose job was to make and distribute a coffee for all of us. Then, when I have started my own business, especially in the first days of the job making coffee was my and only mine responsibility.
You Will Not Have Administration Department
When you work in the corporation for all your business trips there is a department that prepares documents like tickets, hotel reservations, visas… When you are your own boss, in most cases you will be responsible to accomplish all of these tasks when you need to go on a business trip.
These are only three possible cases and comparisons about some tasks for you when you become your own boss. But, in the reality, there are many more tasks than this.
What does this mean for you? This means that you will need to increase your working time for several hours more. With more responsibilities, there is a need for more time investments from your side.
Let’s continue with the numbers to calculate the risk
Let’s say that you work 2000 hours in one year in your current corporate job. For ten years, you will have 20.000 working hours. If we continue with the earnings from the first part of this post that was $500.000 for ten years you will be paid $25 for an hour.
In the same example, your business will earn you in the next ten years $647.500. If these additional activities for you add you only eight hours more weekly which is 416 hours more on an annual level. For ten years you will need to work 24.160 hours for your business. In such a case, you will earn $26 for an hour.
This example tells you that you will earn $1 more with your own business on an hourly basis.
Now, what do you think is it worth to start your own business?
You will earn more money, but you will need to invest much more in your effort to earn more money.
This is only an example. But, the important thing is that you need to make your own calculations when you decide about starting your own company or staying at your current job.
There are also examples of entrepreneurs who succeed in managing their businesses correctly. In such a way, their business work for them. These entrepreneurs don’t work for their businesses. However, this is only a small portion of cases in reality.
Question: What’re your calculations? Can you share with us your own entrepreneurial experience?
