Investing in a new project isn't just about potential rewards; it's also about understanding the risks involved. Here are seven key types of business risk you should consider and the questions to ask when evaluating an investment opportunity.
1. Strategic Risk
Description: Strategic risks are linked to your business model and the market landscape.
Questions to Ask: Does the investment align with our long-term goals? How might emerging competitors affect this venture? Would this investment open new market opportunities or cannibalize existing ones?
2. Financial Risk
Description: These risks are related to your company’s financial stability and market factors like interest rates and currency exchange.
Questions to Ask: Can we manage the investment cost without straining existing finances? What are the projected ROI and payback period? Do we have a contingency fund?
3. Operational Risk
Description: Operational risks involve the logistics and processes within your business, such as supply chain or IT issues.
Questions to Ask: How will this investment impact our current operations? Do we have the resources and systems in place to support it? What are our backup plans for any operational failures?
4. Compliance and Regulatory Risk
Description: These are risks associated with legal regulations that govern your industry. Questions to Ask: Is the investment compliant with relevant laws and regulations? What are the legal implications if the project fails? Are there permits or licenses that we need to secure?
5. Reputational Risk
Description: This involves the potential for negative public perception.
Questions to Ask: How will this investment impact our brand? Do we have a crisis management plan? What’s the sentiment in social media and among stakeholders about this type of investment?
6. Human Capital Risk
Description: These risks are related to your team, including issues of skill gaps, employee turnover, and labor disputes.
Questions to Ask: Do we have or can we acquire the necessary skills in-house for this investment? How might employee morale be affected? What’s our plan for retaining key team members?
7. Economic Risk
Description: Economic risks are external factors like inflation, economic downturns, or political instability that can impact your investment.
Questions to Ask: How sensitive is this investment to economic fluctuations? Are there any geopolitical factors that might impact it? Do we have a plan if there's an economic downturn?
Before you invest, actively explore the seven risk categories. Pose the tough questions to pinpoint potential pitfalls and constraints, paving the way for smarter, more strategic investments. As a business leader, you must also gauge your own appetite for risk. Ask yourself: Am I comfortable with uncertainty? Can I tolerate the worst-case scenario? Does this investment fit within my broader goals for this company? Use these questions to crystallize your own ability to tolerate risk. Growing your business takes thoughtful evaluation but it also take a strong, hands-on leader that remains focused and consistently managing the risks throughout the execution of a new investment to ensure that the results produce the expected outcomes.