Leveraging Forture 500 Business Practices: Managing Risk

Fortune 500 companies use a formal process and mathematical models to manage risk. Depending upon the industry, the appropriateness and validity of their models can be subject to regulatory oversight and require certification by an independent auditing firm. Failure of these models to gauge the probability of risk or the resultant cost associated with recovering from an occurrence is often the lead story on the morning news and can affect countless lives or the environment.

As a current or future business owner you can leverage what these companies have spent millions to learn by conducting your own risk assessment, assigning a probability to an occurrence and rating the severity of each type of risk then developing a strategy to either reduce the risk or mitigate it should it occur.

Plotting these risks on a Risk Cube is a visual method large companies with a formal risk programs have of determining where to focus.  One axis of the risk cube is probability of occurrence and the other is the severity if it occurs.  Risks that have a low probability of occurrence and low severity can typically be readily mitigated.   Conversely those that have either a high probability of occurring and/or a high impact if they occur are those you should insure against.

Risks common to start-up businesses often include the obvious such as: an absence of working capital or a low volume of sales, but the highest risk area is the owner’s ability to show up and run the business during the start-up phase.  The more common Owner’s Risks are:

Owner’s Health: For many start-ups if the owner doesn’t come to work there’s no one to run the business. Although it goes without saying – I’ll say it anyway: if you’re a solo entrepreneur who is dependent upon the business you’re operating for your livelihood, the best investment you can make is to keep yourself healthy. I can hear the collective, “duh”; however, new business owners often sacrifice getting enough sleep, eating right, exercising and getting regular check-ups while they’re starting their business.

Owner’s Reliability and Availability:  To operate a business an owner either has to be available or ensure someone is available who can fulfill client or customer requests during the established business hours.  If the shop is supposed to be open from 9 to 5 and a potential customer finds the door locked, she might not return.  If a customer calls they will probably be willing to leave a voicemail, but your outgoing message should indicate when they can expect a return call.  Failure to return the call is a clear indicator that you’re too busy to provide reasonable service.  If you fail to show up for an appointment because your car broke down or your flight was cancelled you risk not getting that customer’s business, particularly if you don’t call prior to the appointment and let the person who’s expecting you know the situation.

Loss of Income: An injury or illness can derail even the most promising business if it occurs during the critical start-up phase.   Worker’s compensation, short and long-term disability can help pay the bills should this happen.

Because payments are based upon your income and because the risk to your business is often the highest the first year you start your business, you may be able to base your income estimate on your previous salary rather than the estimated earnings from your new business during the first year. This will, of course, may raise your premium, however, you may need those payments due to an injury or illness to meet basic living expenses.

$1,000 Start-Ups has additional sage advice to reduce risk for 60 different businesses.

Staying the Course: Baby Steps

Many years ago there was a movie, What About Bob? In the film Bill Murray played a character who was getting professional help and was taught to take “Baby Steps” to reach his goal.

I was reminded of the film when I was talking with a friend recently who started a home based business last year.   He’s had some success and loves what he’s doing; however, he’s finding it tough to buckle down and get to work every day.

Most entrepreneurs who have home based businesses face this. It takes a lot of energy to get a business launched and get the product or service defined.   The first sales come and you realize just how many you’ll need to support yourself and it seems like such a huge mountain to climb that it doesn’t seem as if one day will make a difference.

You start to believe you might as well go have coffee with your friends, work on that home project, or go shopping … after all you set your own hours and you have at least x months or years before this has to pay off.

The problem is that the end game is so far off that your mind can’t wrap around reaching the goal. My friend’s goal is 1,000 photographs uploaded to a site that pays him every time someone uses one. He has the perfect business model. Do it once, pay nothing unless he’s paid, and the more he has, the more he’ll earn. He knows what’s selling and continues to learn what will sell, yet reaching that number seems so insurmountable.

If you can identify with this situation, figure out your “Baby Steps”:

  1. Set the hours you’re “Open for Business”. Write down what hours you’re going to work and what days you’re going to work. During those hours go to your work area and focus.
  2. Set daily goals. During my hours at work I’m going to produce X   Using my friend as an example, his goal might be to upload one photograph per day or five per week. Don’t forget to consider there are multiple steps involved in most processes, (He has to shoot the photos, process them, upload them, etc.) Use whatever makes sense to you and what will cause you to make measurable progress toward your goal.  It can be setting one new appointment per week or writing one page per day or whatever will make your business grow. Figure out a cycle that’s not more than a week long and set a production goal.   It’s got to be something you KNOW, or almost know that if you stick with it, you can do.
  3. Keep score. Develop a weekly metric and plot it visually every week.
  4. Set up a reward system for yourself.

When I was working on $1,000 Start-Ups, I’d done the research for several years and in the early days of writing would spend twelve hours every day in front of the computer, producing very little. I finally decided that if it was ever going to be finished and published I had to set small, achievable goals. I was lucky enough to have a little beach house and what I wanted to do every day before it got too hot was jog on the beach.

I set the goal that I would write the draft of one chapter every day before I went for my jog. It got too hot by 10 AM to jog at that time of year. I’m a morning person and I really wanted to be free to do what I wanted to do in the afternoon, so my writing hours every day were 5:00 – 10:00 AM, enjoy my jog, then edit the previous day’s work from 11-2.

It was magic. Twelve weeks after setting that goal I had my first draft.

Read more about successfully starting a business in $1,000 Start-Ups.


Balance: Wiring Your Brain to Succeed

This month’s Entrepreneur magazine has an article about willpower that caused me to think about how that personal quality and its twin sister: “perseverance”, are required during the start-up phase of a business.

Willpower is the ability to set a goal and to say “no”, even when it would be easier and sometimes more reasonable to take a detour and not stay the course. It also sometimes requires delaying gratification. We each have our own nemesis: to hit the snooze or get up and work-out, to have one more glass of wine with your friends in the quiet hotel lounge or go upstairs and spend that thirty minutes preparing for the next day; to turn on HBO or think through the approach to removing a barrier that’s impeding progress.

Perseverance is staying the course. It’s staying late until the work is done; it’s taking a deep breath every morning and getting after it again; it’s making sure that at the end of each day you’ve done the best you can do.

Neither means giving up the quality of your life or sacrificing what’s important in your personal life for your professional life. Willpower and perseverance are most effective when you’re not just focused on the long term goal but have broken that goal into short term milestones or tasks so you can make and measure your progress.

When you’re with your family or on your own time, of course the phone will ring and the EMAIL will arrive. Wire your brain to treat it as an interrupt. If you answer the phone or read the EMAIL teach yourself to do what can be done at that moment, then put it away and get back to what you were doing.

When you’re working on your business and your family or personal life needs attention, treat it as an interrupt, take care of the immediate crisis or set the expectation when you’ll be finished, then complete the task or reach the milestone, put it away and enjoy your personal life.

By wiring your brain to be prepared for the interrupts you’ll find you’re prepared when they occur, you don’t resent the important people in your life you sometimes cause them, and you’ll feel more in control of your time.

Staying the Course: Don’t Let What You Don’t Know Get in Your Way

More often than not when I develop a plan to reach a goal there are steps in that plan that I have no idea how to do. What I’ve learned over time is to not let that get in the way of developing the plan, but more importantly, not to let it get in the way of executing the plan.

Typically when I get close to that step in executing the plan I’ll either meet someone who knows how to do that task and can show me (or better yet do it for me) or I figure it out myself.

Much has been written on the ‘synchronicity phenomena’, which is described as the right person (or thing) showing up in the right place at the right time because by thinking about something and expecting it to arrive when you need it, your energy draws it to you. Some folks believe this and others think it’s far-fetched.

Let me offer ‘focus’ as an alternative explanation.   I’ve found when I’m focused on something, I read about it, think about it, and talk about it with my friends and colleagues. Invariably, I either find something written or someone who knows someone who can show me how to do what I need to do. Had I not needed the information or thing I was looking for I probably would have not been reading about or talking about it and I’m sure I wouldn’t have been listening when someone mentioned it in passing conversation.

Here’s an example. I was very close to finishing the final revision of $1,000 Start-Ups and really needed to find a good photographer to do an updated author’s photo. I was at a party that included many of my neighbors. We were all getting acquainted and when the spotlight was on me I mentioned the book and the fact I was looking for a good photographer.   Jerry, who lives two doors down, is a full time city manager, has a small business as a photographer, and ended up taking the pictures. Given all the topics we could have talked about, the fact that he was a photographer might never have come up in that conversation.

I’m willing to bet you have examples like that in your own life. Use those as examples that give you the confidence that when you get to that step in reaching your goal, the help you’ll need will be there.

Setting Yourself Up for Success: Funding Your Start-Up

The reason I most often hear when I’m talking to people who haven’t yet started their own business is they don’t believe they can afford it … and often they’re absolutely correct. Starting a business requires having both enough money and time to get it launched and keep it going while it grows.

Imagine my excitement when I learned about a type of program that not only matches an aspiring entrepreneur’s savings, but offers and requires courses in financial education. That’s exactly what Individual Development Accounts (IDAs) are for and they’re not limited to just business capitalization. They can also be used to save for a home or college. These special savings accounts match the deposits of low- and moderate-income people. For every dollar saved in an IDA, savers receive a corresponding match which serves as both a reward and an incentive to further the saving habit. Savers agree to complete financial education classes and use their savings for an asset-building purpose such as starting a small business.

According to Stephen Slivinski, a senior economist at the Goldwater Institute, data across the United States shows that a 1% increase in the rate of entrepreneurship in a state led to up to a 2% decline in the rate of poverty so it’s’ not surprising that forty states recognize IDAs and that contributions by donors to qualified IDAs are tax deductible.

IDAs are offered through partnerships between financial institutions (such as banks and credit unions) and local nonprofit organizations, or program sponsors. After signing up for the IDA program, each participant opens a savings account with the partnering bank or credit union. Account holders generally make monthly contributions to an account, usually over a period of one to four years, and their savings are matched by donations typically at a rate ranging from 1:1 to 3:1.  IDA accountholders receive regular statements detailing how much they have saved and the amount of match they have earned.

Eligibility for IDA programs varies from program to program but typically have some restrictions regarding income, the source of the savings, net worth and credit history.

To learn more about IDAs and ones that are offered where you live, just type, “How do I open an IDA in (your state)”.