Entrepreneurship is an exciting pursuit that can lead to financial success, personal fulfillment, and an established legacy for your family. However, even in their definition of the word, the Oxford English Dictionary notes that “bearing the financial risks of the enterprise” is an inherent challenge for the entrepreneur.
There is plenty of uncertainty involved in building any business and learning how to be a successful entrepreneur is both an art and a science that can be learned. Below, we’ll discuss the risks of entrepreneurship, along with the rewards, and discover the ways that you can mitigate these risks as you pursue your dreams of running your own business.
Common Risks of Entrepreneurship
Here are some of the most demanding challenges that entrepreneurs need to overcome to ensure success:
Financial Risks of Entrepreneurship
Starting any business comes with foreboding and very real risk of failure that often requires significant financial investment, whether it's personal savings, loans, or investors' funds. There's always a chance of losing this investment if the business doesn't succeed. Statistics indicate 20% of small businesses fail within the first year and only half are still operational after five years.
Competing With Intense Competition
Competition is inevitable in any business. New entrepreneurs must be prepared to compete with established businesses, as well as other startups, and develop strategies to differentiate themselves.
Although your business idea may have great potential, it might get overlooked by potential customers if there are already established businesses that offer similar products and services.
Adapting and Adjusting to the Market
Although it may be common sense not to start a lawn mowing business in the North Pole, there are other times when it can be tricky to see if your business idea would thrive in its prospective market. These risks can arise from external factors such as changes in the economy or shifts in consumer preferences. People change. Times change. Only those who can adapt and adjust are able to weather the storm and come out of it more confident and capable.
Coping With Low Employee Retention
Hiring the right people and managing a team effectively is essential for business success. High employee turnover, skill gaps, or conflicts within the team can hinder progress and impact the company's performance. New businesses that don’t have training and operational procedures set in place may find it is difficult for new employees to learn their roles and support business goals.
Essential Risk Areas Often Overlooked
While many business owners focus on the most obvious risks, such as competition and cash flow, there are several essential risk areas that can quietly undermine a company’s financial health and stability. Overlooking these risks can leave entrepreneurs vulnerable to unexpected setbacks that may negatively impact business growth and long-term success. By identifying and addressing these less apparent risks early on, entrepreneurs can develop effective strategies to mitigate them and protect their business from potential losses. Proactive risk management in these areas is crucial for maintaining a strong foundation and ensuring the ongoing success of any business.
- Managing business loans
- Operational efficiency
- Technology and innovation
With the help of a franchisor like Neighborly®, you can go into business ownership with confidence knowing you have a support system and coaching to help navigate the challenges of business ownership.
4 Ways to Manage Entrepreneurial Risk
One of the chief characteristics of successful entrepreneurs is the ability to overcome challenges, like the ones above. Here’s how you can get a head start and solid footing as a new business owner:
1. Have Your Finances in Order
Before you consider securing financing to start your business, you should assess your personal financial situation. Paying off debt, budgeting for your living expenses, and having an emergency fund can help provide a buffer between a rough start to your business and bankruptcy. Assessing your monetary resources also helps you to decide how much of a business loan you may need.
In addition, any new business should have a financial plan that includes income projections, break-even analysis, and anticipated investor returns within the first five years of operation. Failing to develop an accurate financial plan not only jeopardizes the entrepreneur's financial stability but also undermines the potential returns for investors, including yourself.
2. Do Your Research
Know before you go. Starting a business on your own is risky enough, but if the competition is stiff or if there isn’t a market for your product or service, you could be fighting an uphill battle. Effective research helps you determine if you have an opportunity to enter the market, who would be in need of your product or service, and how you can attract the right people.
It is essential for entrepreneurs to understand the potential risks and develop strategies for mitigating them. By developing a thorough understanding of their target market and staying updated on industry trends, business owners can minimize their exposure to costly losses due to unexpected developments or changing customer needs.
3. Stick to a Business Plan
One of the biggest challenges for entrepreneurs when they start a business is that they don’t have a proven business model. Unfortunately, “winging it” is not a good idea since your customers will expect professional and reliable service and products, and your employees will need to know what services they can offer to your clients.
As they say, “hope is not a strategy.” That’s why having a solid business plan can help you address the risks that come with disorganization, keep you on course when obstacles and challenges arise, and give you a clear perspective on where you have been and where your business needs to head in the future.
Consider a Franchise
Becoming a franchise owner means being your own boss of a locally owned and operated business, with systems and tools from an established franchisor. Franchise companies want their franchise owners to succeed. That’s why many of them offer business plans, training, and support to help along the way.
Other benefits of starting a franchise include:
- Working with a reputable and recognizable brand for easier awareness
- Utilizing an established preferred vendor for hiring and training processes
- Accessing an established business model that has worked for many other entrepreneurs
- Joining a network of franchise owners who can offer encouragement and advice
Risk vs. Reward: How a Franchise Can Help
Investing in a franchise gives you a head start as opposed to building your company from the ground up. Why reinvent the wheel when experienced and expert franchise systems have already created a track record of playbooks, tools, and resources, with many established brands boasting a network of successful outlets?
This provides prospective franchise owners with reassurance that the business model is viable and that they are investing in a concept with a proven track record. The best way to minimize risk and ensure success is to know and understand the challenges your business may face and develop a game plan for not only surviving obstacles but thriving and blazing new frontiers.
See if Franchising is Right for You
Facing the risks of entrepreneurship comes with the territory. But being able to mitigate those risks through a franchise investment could be the right move for you as you create your own individual business with the help of others who are already enjoying success with theirs.
Curious if a franchise makes sense for you? Download your free franchise guide today for more information that will explain the issues and challenges that entrepreneurs often face.
