How to identify risks in business- 5 helpful tips

How to identify risks in business

How to identify risks in business.

Every entrepreneur quickly discovers that every new business venture has some inherent risk. Success in business is dependent on identifying and managing risk.

Managing risk and translating risky situations into profitable decisions first requires business leaders to identify risks before they occur.

When it comes to how to identify risks in business, these 5 helpful tips will allow you to prevent problems before they happen so you can keep on profiting.

How to identify risks in business
How to identify risks in business- 5 helpful tips 2

Risk identification tip 1: Determine if your business is actually profitable.

Everyone gets excited when they have an idea they think they can translate into some revolutionizing business.

The problem is that a sound business is built on providing something that other people want; if they don’t want it, you’re not going to sell it and it’s not going to pay off the investment you need to make to bring your business to reality. 

Before you even begin making a prototype, however, you need to do some market research.  A quick internet search to see what businesses provide products or services related to keywords that you would associate with your idea can save you the trouble of investing further in your idea if it’s already being done.

Likewise, if your idea requires any proprietary status, such as patents, copyrights, or trademarks, searching on government databases such as can save you the legal trouble of investing in an idea that is legally not yours (not yet at least!).

Risk identification tip 2: Is there infrastructure to support your business?

If you have an original business or product idea, or you’ve discovered a new way to make a process better and make money, then the next step is to begin to identify all the steps in the process necessary to bring your product to reality.

For example, let’s say you want to produce a new, glow-in-the-dark cupcake (in case you enjoy sweets when the power goes out!). Producing a cupcake requires a lot of ingredients.

You need to have a regular supply of flour, eggs, baking soda, and frosting (and glow-in-the-dark dye, presumably). You need to have reliable equipment.

You need to have a supply of packaging that accentuates your cupcakes and relays your brand identity, whether it’s a decorative paper bag, cardboard box, or plastic container. 

All of these other ingredients and supplies must be produced by someone else. Given that we live in a global marketplace, one must always be scanning and scouting for reliable prices; at the same time, you can’t always go with the cheapest option and sacrifice quality for cost.

If you live in an area where acquiring specific components or ingredients is exorbitantly expensive, and your product reflects the higher cost, you may not be able to sell to the local customer base. In such a case, you either need to find a new market or create a new product.

Risk identification tip 3: Is this the best location for your business?

The location takes into account two considerations: Where your business is located and to whom you are selling. With regard to the previous risk identification strategies, you should have a good idea of who your customers are going to be (no, not just your friends and family).

You should have an idea of what demographic they are, how much they are willing to spend, and how often they are going to spend on your products. 

A potential loophole with regard to location is using online sales platforms. Selling online greatly expands your customer base from your present location. The only problem is that you need to be able to market your goods and you need to be able to ship them.

If you can’t differentiate yourself from other online products or you can’t provide reliable, cost-effective shipping, you’re not going to make any money on your product.

Finally, location, whether you’re an online retailer or even a mobile salesperson, requires some level of infrastructure investment. In this regard, quality definitely trumps cost.

Starting out on an inexpensive site can be a good way to get your foot in the door, but generally, a lack of expense comes at a potential price.

While it’s great to be optimistic about how much you’re going to change a site just by being there, taking stock of potential negative outcomes that can affect the physical location of your business can save you a lot of lost revenue down the road.

Risk identification tip 4: Knowing if you’ll be backed by investors

Gaining the support of customers is hard enough, but getting backed by investors adds another challenging layer. First, make sure that your business is legally incorporated and registered.

Second, develop a formal business plan that identifies your mission, employment structure, objectives, and how you’re going to achieve your business goals.

Finally, even if you are just trying to secure a small business loan, invest in developing a good credit score. If you have to use your credit card or take out any other loans, make sure they are paid back in time.

No investor, from a bank to a venture capitalist, is going to be willing to fork over their precious dollars to a business that has neither solid credit nor a sound business structure and associated revenue.

Risk identification tip 5: Being able to predict market shifts

Being able to predict market shifts is the most challenging aspect of navigating the business world. When it comes to identifying shifts in consumer demand, the challenge is to know what customers want.

Being receptive to customer feedback can guide how you modify your business. If you continuously hear customers voicing a preference for something, changing your business, whether regarding accessibility, presentation or inventory, can prevent losing customers. 

When it comes to responding to novel market choices, the key is to always be innovating and creating something relevant. Creating product variety is another great way to attract a diverse clientele while keeping your clients engaged and interested in what you have to offer.

If you have the time and resources, investing in research and development, whether internally or externally, can also discover new product ideas, marketing strategies, or innovative processes to constantly improve your business.

The biggest and most challenging risk to identify is a change in the global, macroeconomic marketplace such as inflation rates, interest rates, global unrest, or large-scale weather patterns.

Unless you study global weather patterns or international diplomacy, it can be difficult to predict how weather or politics will affect your business. However, it’s always a good idea to be aware of prices for a variety of goods shifting throughout the global marketplace. 

You don’t have to become an economist, futurist, or disaster management specialist to predict how risks will arise in your new business venture.

Doing sufficient research, exercising some degree of caution, and evaluating each stage of your business is a great way to know how to identify risk in business so you can keep your business booming.

Jenny Fischer

Jenny Fischer

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