Risk: what an entrepreneur puts on the line

1. Edexcel names three risks an entrepreneur takes on.
   1. Business failure: the business runs out of cash, cannot pay suppliers or rent, and closes.
   2. Financial loss: the savings, redundancy money or loan the owner put in are gone and cannot be recovered.
   3. Lack of security: there is no guaranteed wage, no sick pay, no paid holiday and no redundancy payment if it ends.
2. Failure is common rather than rare, since roughly one in five new UK businesses stops trading within its first year and only around four in ten are still going after five years.
3. The financial loss is larger than the cash put in, because the entrepreneur also gives up the wage they would have earned elsewhere.
   1. Someone who leaves a £28,000 job and puts £15,000 of savings into a shop has staked £43,000 in the first year, not £15,000.
4. Lack of security bites hardest in the early months, when takings swing from week to week but the rent, the stock bill and the household bills do not.

The impact of risk: it changes what a business actually does

1. Risk shapes the decisions an entrepreneur makes from day one, and each common response to it cuts the possible loss while taking something away in return.
   1. Start small or part-time: keeping a job while trading at weekends means a failed idea costs savings rather than the household income, but growth is slower while the gap in the market fills up.
   2. Do market research first: asking customers before committing reduces the chance of stocking something nobody buys, though it costs money and weeks that a faster rival can use to reach those customers first.
   3. Rent rather than buy: renting equipment and premises keeps the amount tied up small enough to walk away from, but costs more over several years than buying would have done.
   4. Hold a cash buffer: money set aside covers a slow month, since most failures come from running out of cash rather than from a bad idea.
   5. Insure against the losses you cannot absorb: stock, premises and public liability cover turn a possible disaster into a monthly premium that is paid whether anything goes wrong or not.
   6. Choose the ownership type carefully: setting up as a private limited company separates the owner's personal money from the firm's debts, which is covered in 1.4.1.
2. Because reducing risk usually means accepting a smaller or slower return, the entrepreneur is trading one against the other rather than escaping either.
3. Risk also pushes decisions the other way, because an entrepreneur who is too cautious never commits enough to make the idea work.
4. Risk is only half of this spec point, since Edexcel pairs it with reward, which 1.1.2b covers and which exam questions usually ask you to weigh against the risk.

Judging how much risk is worth taking

1. Judge whether the entrepreneur could survive the loss. The same amount of money can be manageable for someone with spare savings but damaging for someone relying on it for household security.
2. Compare that risk with the possible reward and whether the idea can be tested cheaply before large spending is committed.
3. Overall, a risk is more reasonable when the potential loss is survivable and the entrepreneur can learn about demand before making the largest commitment.