Dealing With Risk

Like the 2,000 pound gorilla at a small party, whether you choose to acknowledge it or not, risk is always present, just standing there at the pretzel bowl waiting for you to turn around.

Risk is something that is always there in any business enterprise (or in any life). But it is not something that people like to talk about a whole lot.

Some folks seem to believe that by just staying put and not tempting fate, they can avoid any risk. By just keeping everything as it is, they can avoid the risk of trying something new and failing miserably. But like the proverbial 2,000 pound gorilla at a small cocktail party, whether you choose to acknowledge it or not, risk is always present,just standing there at the pretzel bowl waiting for you to turn around.

In this column we're going to encourage you to look that gorilla straight in the eye, grab him by the collar and greet him with a kiss on either cheek. That's right, embrace risk as, if not your friend, at least your potential ally.

One thing that most folks forget in the risk avoidance scenario is to look not only at the risk of doing a particular thing, but also to think about the risk of not doing that thing, or the risk of not doing anything. In the fast changing world of natural foods, this can be a critical error.

Worried about the risk of buying that new piece of equipment or making that key move? What about the risk of not doing those things and losing your existing customer base to a fancy competitor or to the bulk department of your local grocery? Worried about the cost of taking on debt to finance your project? What about the cost of not taking on debt, and delaying the purchase or the move so long that the opportunity is missed?

This is not to say that every equipment purchase or move is a good idea, or that debt is the way to finance everything or anything. It is only to say that we must look at risk holistically, to consider the risks of various actions as well as the risk of inaction and then weight those risks and benefits accordingly.

Any risk worth considering has a reward on the other side. How great the reward relative to the risk is something that can vary quite a bit, however. Is a risk worth taking if you have a 15 percent chance of making a 20 percent gain but a 85 percent chance of taking a 5 percent loss? Is a 10 percent chance of making a 50 percent gain better or worse than a 50 percent chance of making a 10 percent gain? And again, what are the risks of doing nothing? It all depends.

One step that is important in getting comfortable with risk is differentiating between taking a risk" and "taking a gamble." With a gamble, the ball is out of your court. All you can do is sit there, rub your lucky rabbit's foot and hope for the best. With a risk, you can do a lot more to ensure a favorable outcome. While you probably can't eliminate risk altogether, you can take steps to mitigate risk, turning your garden variety risk into a "calculated risk." Here's how:

  • Start from a good foundation. A financially and operationally strong organization is better poised to take advantage of opportunities and weather disappointments. Raise that equity, create those systems, build that organization. One day, you'll be glad you did.
  • Educate yourseff. Learn all you can about your situation, both from experts and from your peers. Find out what the economic trends are in your town, your country, your industry. Talk to others who have been in your situation and find out what their problems were and how they overcame them.
  • Analyze your situation (or, name that gorilla). Maybe you need a new produce cooler, but don't have all the money saved up. An attractive display would be nice and probably bring in customers, but you're not sure if you can make the monthly loan payments. It seems like a big risk. Now, use what you know and try to analyze that risk. A refurbished cooler costs maybe $5,000. You have $2,000 saved and borrow the rest at 10 percent over 24 months, with monthly payments of about $138. At a 31 percent margin for produce, you would have to sell about $15.00 more produce each day than you do now to cover the loan payment. That's maybe 15-20 pounds of organic carrots or similarly priced produce. Can you do it? Consider the shrink losses of the old cooler and the fact that people can't even find the organic carrots in the antique cooler you use now, you think you probably can. In fact, you might even sell more and make some money. Now all of a sudden this risk looks more and more like an opportunity and the gorilla looks less like King Kong and more like Curious George.
  • Expect the unexpected. The really scary thing about risk is that you don't know what will happen. If you are confronting a really risky situation, such as a major expansion or relocation, you really do need to sit down and think, ~What is the worst thing that could happen?" It could be pretty bad. Now think, 'What can we do to make sure that that does not happen?" You may get comfortable and decide that your organization has the skills to weather any challenge that is likely to come up. Or you may decide that it is just too scary, the rewards aren't great enough, and you are not going to take the risk.

To take the risk or not to take the risk, that is the question. Either answer may be the right one. The point is to confront risk. Face it, acknowledge it, look at it, examine it. Take some of its power into your own hands by analyzing it. It sure beats rubbing a lucky rabbit's foot.

See other articles from this issue: #068 January - February - 1997