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.
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:
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.