The most successful business owners have an innate understanding of risk and how to manage. This paper evaluates four different companies in risk lessons on effective risk management.
Risk concerning the overall impact and the probability of a specific result. For example, a 20% probability of a loss of $100,000 was an expected value of ($ 20,000) while a probability of 10% of a gain of 1 000 $000 was valued at $100,000. The smart business owner constantly assesses risk in its business relations in order to minimize potential inconvenience and maximizing upside potential.
In other words: it is wise to invest in companies and markets that have a high probability of upside and minimal inconvenience. Although it seems obvious when explicitly, many companies operate on the opposite principle. This is why many entrepreneurs invest their savings in a business only to see their dreams dashed.
Following four different companies and their risk profile:
One: Editor online. This company develops programs of distance education for fitness professionals online. To manage the risks and avoid significant investments in product development, begins with a simple ebook, written by an investment. It tests the ebook with a low-cost Web site. If the e-book sells well, the company invests in an expanded program with a book of paper, DVDs and seminars. It tests the different marketing strategies for small scale and rolls out strategies that works well. In short, this company is able to generate excellent profits through a low-cost testing strategy and implement. At the same time, it focuses its products in a niche market (fitness) to offer new products to its loyal customers, at a much lower marketing cost.
Two: Mortgage brokerage. As almost everyone and their brother started mortgage companies in the first decade of the new millennium, few were really generating profits. In the case of this enterprise, the owner has over twenty years of experience, originating loans for one of the best corporate finance worldwide. He had exceptional contacts with business loan, relations with interested client best sellers in the industry, a proven approach businesses closed and understanding. He recruited four of these commercial top he knew - based nominal commission only - and show with costs in the basement of his house. Less than a month it has generated more than $100,000 per month fresh with almost no overhead. Here, you see a company that generates excellent returns with nominal risk.
Three: The event promoter. The established sponsor on events of professional fighting in a rap arms crossed in market growth. Cost more than $85,000 to put on an event and most of this sum should be paid to the front - before any received. It was virtually impossible to ticket sales for the project on a night because most people purchased tickets two weeks before the event. Concurrent event, bad weather or cancellation by a participant of the event could be expensive and stressful. The returns on an event ranges from 150 000 to $ 60,000 only recipes. In short, this company has provided very unpredictable returns with a high initial investment (e.g. risk). Promoter depended on the glamour of the company factor and hopes his company to brand and sell on the road to a person interested in an exciting lifestyle company in a rap arms crossed in industry growth. However, it makes sense to rely on this exit without a predictable cash flow strategy?
Four: Fitness facilities. A fitness centre generally requires a large investment, front to purchase equipment. The owner of the enterprise began with a moderate space and equipment and financed at a good pace. He marketed so strongly to clients to generate ongoing monthly fee to cover its rental fees and finance charges. After six months and through an effective and aggressive marketing, he was able to profitability on its outgoing cash flows. After one year, it was profitable and preparing to open a second location. He had approached a Manager to run its first location, so that he could resume cycle on a second. In this case, the owner has generated excellent returns despite the requirements of a large investment from the outset.
The above examples, can conclude the following rules for successful risk management:
* Test products and marketing strategies to invest considerable sums. Expand only when the strategy has been proved. If a business requires an investment not proved a huge initial investment, not to invest.
* Search and hire the best talent, which includes business and can generate exceptional results - while providing leverage for the owner of the company.
* Like Warren Buffet recommends, get only in companies that understand you and know. If you know the company and that you still want to come in, spend time on research.
Look for businesses where cash comes before it comes out - not the other away autour. If possible, to minimize the cash outs with leverage.
* Search firms with cash flows of repeated loads, membership and loyalty of high rent charges.
* Do not invest in companies that require a high risk and provide only moderate returns (such as the promotion company). Instead look at low risk and high - performance businesses or manage with this principle in mind.
* It should be easy with flex at the top and down business cycles. reduce the fixed costs.
* Avoid business based on glamour rather than on regular cash flow.
* Develop systems that allow for expansion and growth of businesses.
* Buy at a profit, don't sell for profit. In this way, a downturn in the market will have only limited effect on investment.
Andrew Neitlich is the founder of the Institute for the growth of enterprises, http://www.instituteforbusinessgrowth.com, which offers entrepreneurs, coaches and consultants a turn key opportunity to help business leaders develop their businesses and succeed.
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