Risk and uncertainty

1. Because a risk can be estimated, a business can weigh the possible loss against the possible reward and decide whether the decision is worth taking.
2. Uncertainty cannot be estimated in that way, and a pandemic, a war that sends fuel prices up or a sudden change in the law arrives without warning.
3. Every business faces uncertainty, because each decision is taken now and pays off later, and nobody can see or control what happens in between.
   1. The distinction matters in practice: a risk is planned for with figures, while uncertainty is prepared for by staying flexible and keeping money in reserve.

The risks and uncertainties a business faces

1. Changing tastes: what customers want can move quickly, so a fashion retailer that misreads a trend is left discounting stock nobody wants.
2. New competitors: a rival can open nearby, or an online seller can reach the same customers from anywhere, and neither event is in the firm's control.
3. Economic change: a recession, higher interest rates or rising inflation cut what customers can afford, while the firm's own energy and materials cost more.
4. Supplier failure: a supplier can raise its prices, deliver late or go out of business, and a firm relying on one supplier for a key part has to stop production.
5. New technology: technology can make a product or a whole way of selling out of date, as streaming did to DVD rental and to the shops that sold discs.
6. New legislation: a rise in the legal minimum hourly rate or a new safety requirement raises costs at short notice, and the business has no choice about meeting it.

Why entrepreneurs take the risk

1. Profit: the reward for accepting the risk is the profit the owner keeps, and a successful business can pay far more than any wage.
2. Independence: being your own boss means deciding what to sell, who to work with and which hours to work, with nobody above you to overrule it.
3. A gap in the market: an entrepreneur who spots something customers want but cannot get takes the risk to reach them first, as Monzo did by offering banking through a phone app.
4. Turning an interest into a living: Ben Francis started Gymshark making gym clothing at home while at university, because it was what he cared about.
5. Building something of their own: some want the satisfaction and recognition of creating a business, and some want to provide a service their area lacks.

How a business can minimise risk

1. Market research: finding out whether customers want the product, and what they will pay, before spending money on it means fewer launches fail.
2. A business plan and a cash flow forecast: setting out costs, expected sales and the finance needed shows problems early, so a month that is forecast to run short of cash can be covered by arranging an overdraft in advance.
3. Testing on a small scale first: a market stall before a shop, or a launch in a handful of stores before a national one, keeps the possible loss small enough to survive.
4. Keeping cash reserves: spare cash absorbs a sudden fall in sales or an unexpected bill, which is how many firms rode out the jump in energy costs that closed others.
5. Insurance: a premium cannot stop a fire, a theft or a customer claim, but it turns a large unpredictable loss into a small predictable cost.
6. Spreading the product range: selling several products means a fall in demand for one does not sink the business, which is why Warburtons sells wraps, crumpets and thins alongside sliced bread.
7. Choosing reliable suppliers, and more than one: checking a supplier's record for quality and delivery, then using two suppliers for a key material, means one late delivery cannot halt production.