Skip to Content

How to Measure and Reduce Business Investment Risks

Every business and investment comes with some degree of risk. Even the most detailed and well thought-out business plan cannot completely eliminate business risk.

However, you can reduce the risks inherent in running your business by identifying such risks and assessing their seriousness. In fact, the success of your business hinges largely on how you measure such risks and implement tools to minimize them.

However, you must bear in mind that business risk measurement is a continual exercise. Even if you have carefully identified business risks while preparing your business plan, you need to repeat the exercise at regular intervals after your business gets off the ground. Why? The reason is because many business risks are only identifiable after a business takes off, not when it’s still in the making.

Recommended:  How to Invest Without Being an Accredited Investor

What are Business Risks?

Business risks are threats that can significantly hurt a business or even cause its failure if not identified or addressed. Though business risks vary from business to business depending on industry and other factors, some risks apply to a wide range of businesses. Examples of business risks include the risk of:

  • Theft or employee misconduct
  • Departure of key employees
  • Debt or financing risks
  • Competitive threats
  • Cash flow or profitability risks
  • Foreign exchange risks
  • Regulatory or economic environment risks
  • Weather risks
What are Investment Risks?

Investments are a sure way to make money; but it comes with risks which if not handled properly can put the investor at a greater risk of going broke or bankrupt. That is why care should be taken to avoid such risks. Some real risks that an investor may face include:

  • Decrease in the value of investment over the years like in stock investment
  • Unavoidable losses that you have no control over, like the loss you encounter when you invest in forex market
  • Bankruptcy
Recommended:  How to Truly Diversify your Investment Portfolio

Whichever way the risk may occur, there are some steps you can take to measure and minimize the risk to the barest minimum.

How to Measure Business Investment Risks

a. Identify internal risks

Identifying the internal risks to which your business is exposed should be a collective responsibility. Your first step towards achieving this is to call a meeting with stakeholders and key employees to identify potential internal risks that apply to your business, such as disasters, employee misconducts, and so on. Ask employees at the meeting to identify the risks related to their respective departments.

During the meeting, you should also determine the extent to which each of the identified internal risks will affect your business. You might need to review past performance or market trends to get a clearer picture of this.

Recommended:  Best Places to Invest Retirement Savings

Divide the internal risks identified into categories based on the departments within your company. For example, risks such as computer failure and loss of data will be categorized as IT-related risks. This will simplify the task of mitigating the risks.

b. Identify external risks

Your next step is to identify the various macroeconomic variables that have the greatest potential to affect your sales or production and distribution costs. Examples include inflation risks, competition risks, foreign exchange risks, and regulations on domestic and imported goods.

After identifying the macro-economic variable that can affect your business, estimate the impact of potential changes in these variables on profitability. For example, “A 5% inflation rate will reduce profitability by 15%” or “An 8-10% increase in the pump prices of gasoline will reduce profitability by 6%, since the demand for gasoline-powered vehicles will reduce.”

c. Create a cash flow statement

Recommended:  Investing for Capital Gain or Cash Flow – Which is the Best

After identifying the risks to your business and figuring out how each of them will affect your business, create a cash flow statement to recognize how much cash you have readily available for combating the identified risks. Ensure that you have enough cash or liquid assets to fund your business for at least six months. And keep an eye on receivables. Understand that you can never be sure of getting your money back from a customer until you actually get it back.

d. Measure your risks

Your next step is to measure and prioritize your risks by creating a formula based on the components involved, such as net income minus expenses, or the probability of an event of accident multiplied by the cost of the event.

Recommended:  How to Invest in Emerging Markets

During your measurement, you must consider other factors, such as the impact of a risk on your business and the total cost of mitigating the risk. Where you have no previous experience or data about a risk, you can use best estimates obtainable from industry reports or the web.

After measuring the impact of your potential business investment risks, you should assign a percentage of importance to each, and rank them based on the percentage assigned. Since the essence to measuring your business risk is to reduce those risks as much as possible, you need to implement measures for reducing the likelihood of even the least significant risk in your assessment report.

Recommended:  How to Invest your Money

For example, if your choice investment is a manufacturing business, having your supplier run out of your major raw material is one of the most significant risks to your business. As such, you can reduce this risk by simply diversifying your suppliers, since depending on just one or two suppliers will put your business at high risk.

10 Guaranteed Ways to Reduce Business Investment Risks

1. Your Investment Should Be on Commodities That Can Appreciate-: I mentioned earlier that one of the risks an investor faces is decrease in the value of the investment over the years and I used stock or shares as an example. One way to reduce investment risks is to invest in just commodities that have the tendency to increase in value over the years. One of such investments that can increase in value is real estate. Properties tend to increase in value as time goes.

Recommended:  Investing vs. Saving: Which is the Best

2. Choose Only Investments That are Guaranteed to Bring Returns-: All investment offers come with a guarantee that the investor will have a good returns on he or her investment; but not all investments are guaranteed to yield result on investment; some are more risky than others. It is better to with an investment with low returns on investment but guaranteed profits than a high risk investment with no guarantee of returns. For instance, if you or a fixed deposit account, the returns on your investment may not be much but you are guaranteed payment of returns. It is better than investing in shares of a company that may file for bankruptcy later.

Recommended:  How to Become an Investor from Scratch With Little Money

3. Don’t Put All Your Investment in One Venture-: This is one big mistake any wise investor should avoid. No matter the guarantee you are given or how profitable an investment venture may look like, don’t invest all your money into just one venture. Learn to diversify your investment capital into other business ventures. This way, if anything goes wrong with any of the investments or ventures; you will have other ones to fall back to. Besides, it is said that a person can rarely become wealthy or financially free by just focusing on one business or investment.

4. Know Your Risk Bearing Capacity-: This has to do with knowing how much you can afford to lose in any investment without landing yourself into serious financial troubles. You have to calculate your income and expenditures and know how much risk you can afford to bear. Remember not to invest any amount meant for payment of bills or servicing of loans, or putting an amount you may need sooner than later in a longer term investment.

Recommended:  Characteristics of Successful Investors

5. -: Another smart way to reduce your investment risks to the lowest minimal level is to take up insurance for all your investments. There are insurance policies geared to cover an investor from any possible risks of investment and pay compensation on the occurrence of such risk. Not all investments can be insured, but if the investment you are trying to make has an option for insurance, it will be better to take up the offer.

6. Learn to Hedge Your Investments-: Taking a hedge on investment has to do with making a counter investment to cover up for the losses made in the present investment; this works better in ventures like stock trading. For instance, you bought a stock from a company named A and along the line, the value of the stocks starts depreciating fast. Instead of selling the stock and making a huge loss, you can decided to invest in another fast rising company whose stock value is appreciating rapidly to make up for the loss you had from company A.

Recommended:  How to Truly Diversify your Investment Portfolio

7. Engage More in Long Term Investments-: If you are not a forex trader who uses the scalping method to grab little short term profits from the market, you should learn to leave your investments for a long term. Most investments increases in value as the years go by; for instance real estate market. This will only work if you don’t have an immediate need for the money you invested in the venture.

8. Get Top Information to Monitor Your Investments-: Investments are not something you just make and forget about it; unless you are paying top bills to professional to help keep an eye on the market situation relating to your investments. If it means paying for daily, weekly or quarterly alerts from a tipping company to keep you ahead of happenings in the market; just do it. Knowing the situation of the market will help you make your choices like when to invest and when to pullout your investments; thus helps you reduce making mistakes that may be risky on your investments.

Recommended:  How to Invest Without Being an Accredited Investor

9. : No matter how informed you are, a professional will still remain a step ahead of you. That is why you need to consult major professionals or key players in market to get their advice to know when best to invest in a business or when not to. This will save you a whole lot of headaches and losses in the future; and knowing that most of them have insider information is enough reason to consult their services.

10. Learn to Follow Your Guts-: Sometimes, you have to follow your guts when making a decision on investments because I have come to realize from experience that over 70% of the time, your guts is always right. If you are present with an irresistible investment off that seems too good to be true and you have a feeling in your guts that this investment may turn out bad later; the wise thing to do at that moment is to turn down the offer.

Recommended:  How to Get Investment Banking Internship without Sweat

These ten tips mentioned above will help you minimize risks that comes with making investments; the keyword here is minimize and not making the risks go away; so you still have to be wise in making your choices.