Why Planning For Risk And Failure Will Save You From Going Belly Up?

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Why Planning For Risk And Failure Will Save You From Going Belly Up?

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While entrepreneurs laboriously engage in extensive planning and forecasting, the reality is that it is impossible for them to predict all conditions and assumptions especially in the future. So, even though the business plan and financial projections may be based on certain assumptions and be contingent upon certain environment factors, be mentally prepared that things may not go as planned.

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Why is it important to identify the risks involved in running the business?

The business plan should always spell out the risks clearly, because it gives the entrepreneur and the team confidence by providing them with a security net and back up plans in the event that things go awry. The risk and contingency plan should clearly list out all the possible risk factors that directly and indirectly affect the company’s performance and forecasts. The risks should be critically analyzed and their impacts should be quantified so that coherent contingency plans can be generated.

Contingency plans allow the entrepreneur to adapt to the new situation making his business dynamic and sustainable. Planning ahead for a rainy day will enable the entrepreneur to remain calm and composed should the situation deteriorate. Without contingency plans, the people engaged in the business will panic and implement hasty solutions and plans when things do not go according to plan. Needless to say, it becomes extremely difficult to generate plans in a tensed and critical situation as the entrepreneur’s mind will already be focused on preventing his business from falling apart. Most of the time, when people are in the firefighting and troubleshooting mode, they barely have time for long term planning or for that matter any type of planning.

It is very important to spell out the risks clearly in the business plan because it demonstrates that the entrepreneur and his management team are realistic. To an external party, a business plan detailing all the possible risks in a comprehensive manner is crucial. The contingency plans to address and mitigate the risks also highlights that the entrepreneur will be able to maneuver and adapt his/her business in response to changing conditions, which makes his/her venture attractive to prospective investors.

Now that we have discussed why including risks and contingency plans are important, here are some examples of risks which are typically included in business plans:

  1. Market risk- Market risk involves factors that are uncontrollable which can affect the market and the company’s ability to address the market. Since market research is absolutely paramount to the viability of businesses, identifying market risks is a must to ensure that the business remains relevant in light of changing market conditions.
  2. Execution risk-This entails the team’s inability to implement the business according to plan. They may default on meeting deadlines in manufacturing their products or they may fail in engaging customers and raising funds. This aspect of human error must be taken into consideration as proper execution is what distinguishes an innovative idea from a successful business.
  3. Technology risk-This refers to the company’s inability to develop the technology required. This could also happen if the technology that was assumed to exist was not established on time. An entrepreneur needs to be far-sighted and plan for when the technology that they require does not materialize.
  4. Environment risk- These risks such as the state of the economy, condition of the industry and competitive landscape are uncontrollable and yet they can adversely affect businesses if entrepreneurs are not equipped to deal with these changing conditions.
  5. Regulatory risk-This entails the effect of government policy on the company’s operations and business executions. It is important to take note of this risk as governmental policy determines the infrastructure and avenues available for entrepreneurs to start and sustain their businesses.

Ultimately, identifying risks and planning how to mitigate them helps tremendously in making a business successful. Entrepreneurs need to include risk factors and contingency plans into their business plan which essentially serves as a blueprint for their business so that they can prepare themselves for a rainy day. While some of the conditions may be unfavorable and uncontrollable, knowing the risks and having alternative plans will enable entrepreneurs to rise above the challenges and attain success in their business ventures.

 

1 Comment

  1. Scout says:

    I’m imspsered you should think of something like that

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