How do you approach business risk? Answering this important question can help you maximise your resources set aside for re-investment into business operations. Determining if your overall position is risk averse, risk neutral or risk seeking can help you identify investment priorities. Leverage this advice to enhance your efforts to grow and expand your business in a focused, conscious and effective fashion.
Although not strict definitions - business owners often feel like they fit between two categories - recognising these three approaches to risk management will help you define your company's strategy. Frequently used by investors whom are deciding which stocks or other financial instruments to buy, these definitions also apply to the ways in which you put money back into your business. Don’t be concerned if you fit into a specific category right now - as it’s common to shift from one category to another based on personal factors and the performance of your business. It’s also noting that you may also seek more risk if your company is in a particularly strong position, or become risk-neutral when potential gains from an investment are a clear priority.
A risk-averse business owner values certainty and predictability and will typically choose a “sure thing” investment as opposed to a more volatile option that offers higher risk and reward. An example of this type of an investment could be purchasing or financing new equipment for a core, established operational need such as residential construction, instead of investing in new equipment to expand business operations into new commercial or industrial jobs. Risk-averse business owners will still take advantage of opportunities to grow and diversify - but tend to make more modest and strategic decisions.
A risk-neutral business owner generally discounts risk when making decisions about where to re-invest into operations, except in extreme situations. In other words, this type of business owner typically focuses on potential gains regardless of whether the possible benefits are tied to a significant, yet manageable, chance for complications and failure. Generally speaking, risk-neutral business owners are interested in potential opportunities that yield a strong return.
A risk-seeking business owner will gladly accept an opportunity with greater risk in exchange for a similar increase in potential return. Although owners have personal limits regarding acceptable levels of potential downside, risk-seeking business owners generally accept higher levels of potential problems when the reward is valuable enough. It's important to note that in this financial context, risk-seeking doesn't occur for its own sake. Business owners are simply willing to accept more risk in exchange for a greater reward than a risk-averse owner in the same situation.
As you identify with one of the three risk approaches or somewhere between two, these risk approaches can help you determine where business development funds should be invested. Whether you have a high tolerance for risk or want to make safe decisions that lead to a more predictable return, understanding your stance on risk will enable you to make decisions that align with your future plans of your business. This approach can help you steer your organisation in the right direction while providing a consistent framework for investment-related choices of all sizes.
Regardless of how you approach risk as a business owner, Cat Financial is here to help you get the equipment you need for your current and future operations. To learn more, get in touch today.
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