Business Risk

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Every investment decision involves some form of risk.

Even hiding money in a mattress or a safe deposit box entails the potential for loss of buying power through inflation or even theft.

Risk is the anticipation of loss.

What if the business succeeded? Therefore, risk should be equated with reward.

The lower the risk, the lower the reward. The higher the risk, the reward should be higher.

In the "Investment and Resource Pyramid" that I always refer to in financial planning, the top in the pyramid is the High Risk category.

It includes long options, commodities, raw land, and venture capital.

The first 2 are for the sophisticated investors that you can become later.

The purpose of this article is to discuss how to manage your risk in going into business or providing capital to promising business ventures.

Business risk management can be a combination of the ff:

1. Minimize your investment allocation, usually 5-10% of your investable funds, while the bulk of your fund allocation goes to Safety and Long-term Growth and Income categories.

When you lose the 10%, you still have the 80% tucked in safety investments. What if the business venture prospered? You can get your money back (exit from the business) and reap a high reward.

2. Focus - be wary if the company has other businesses (products or services) not related to the core business or the experience of management. It is not focused.

For example, Aredconsult, Inc. focuses on internet marketing and promotions of products and services, as well as Meralco focuses on electricity retail.

When Meralco ventured into power generation, it has a separate company doing it.

Simply ask yourself - "what if Meralco ventured into shopping malls, will you invest?" It is not Meralco's core business and competence. It is Shoemart's.

3. Steady Cashflow and Liquidity - is there a product or is the product itself a "milking cow" for the company now and in the years to come.

A milking cow generates steady income over and beyond the overheads to produce net profits.

For example, the "milking cow" of Aredconsult, Inc. is the Google Adsense. It is a pay-per-click advertising program of Google that pays publishers like us whenever our site visitors click on Google ads posted on our websites.

As surely as the sun rises on the East, we receive Google's check in the mail every month. It pays for our overheads and funds our other products and services still on market test.
Lastly, the "milking cow" product provides the necessary cash liquidity to react to the changes in business environment.

4. Short break-even - break-even is the point in time when revenue is equal cost. Beyond this point, the business shall generate pure profits.

A shorter break-even point means that the gestation period of the business is also short. It is much preferable to choose a business with a short break-even point than a business with a longer one.

Most businesses that have long break-even points require intensive capital for fixed assets, i.e. land, building, etc.

It will take time (years) to recover the costs from these fixed assets from the revenue that can be generated from the business.

5. People - is there a continuous improvement and training of the manpower? Then, it is preparing to succeed.

Of course, other authorities will dispute my suggestions above or add to it. I have no quarrel with them. I just looked at this matter from a different perspective.

It's really up to you as an investor. Each individual has varying risk tolerance.

The "risk takers" look at the reward while the "wealth preservers" look at safety. They are different sides of the same coin. Who are you?

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Learning to sell online is going to take time. If you have time and can afford to lose hundreds- even thousands of money in sales as you learn from costly mistakes, that is fine.

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My Business Risk Lenses

Business Risk
Money Mistakes
Investment Gold
Retire Rich