Q What's the best way to measure potential risk?

  • Updated: August 1, 2010 - 3:49 PM

Q In today's economy as a ''minipreneur'' (a small-business owner who still keeps a day job), I am investing my own funds, at times borrowing from my 401(k). I understand managing risk, but what is the best way to measure potential risk so that entrepreneurs have more tools to make strategic decisions?

KATERINA TAYLOR

SMART KIDZ MONEY MATTERS

A Assessing and managing risk is a key challenge for entrepreneurs. Risk measurement is simply determining the potential future states of the world, the probability of each of those states occurring and their impact on your venture. Simple, right? Unfortunately, much of this uncertainty is irresolvable without actually entering the market. But it can be reduced through research and hedging. That includes market research, such as survey and focus groups, prototype development, searching for prior entries in the market and extensive reading about the market. The overall antidote to uncertainty is information, expertise and judgment developed through hard work and experience. Still, there are some ways systematically approach risk assessment.

Begin by making a list of all the uncertainties surrounding your venture. Be as specific and exhaustive as possible. Then review your list and attempt to add even more specificity. For each of these, list the potential outcomes -- what might happen and what each outcome means for your business. Pay particular attention to those outcomes that you judge to be critical to success or failure of your business. Next provide your best estimate of the probabilities of each of the outcome occurring, your confidence in your estimates, and what actions you could take to improve your estimate and your confidence in it. Prioritize the uncertainties based on impact, probability and the effort and investment necessary to lower the uncertainty.

This exercise gets you to focus your time, energy and resources on the key uncertainties in your venture so you can maximize the return to your investment. You will never be able to eliminate risk, but through research and action you can unwind a lot of it. And while eventually you have to start the business, that doesn't mean you stop managing risks. In fact, risk management following start-up is every bit as critical as before.

DAVID DEEDS

SCHULZE PROFESSOR OF ENTREPRENEURSHIP

UNIVERSITY OF ST. THOMAS

OPUS COLLEGE OF BUSINESS

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