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Dec 18

Welcome

We have missed our dedicated readers and we are so excited to connect again. We are back to complement and enrich your information and learning interests.

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Toyin Wura Oke

Publisher/Editor-in-Chief

Risks, an Entrepreneur’s Best Friend.

Risks, an Entrepreneur’s Best Friend.

 photo: wikimedia

photo: wikimedia

It is on record that Orville Wright (1871-1948) and Wilbur Wright (1867-1912) invented the airplane. The first engine-powered airplane to fly was the Kitty Hawk on December 17, 1903. On this maiden flight, the craft soared to an altitude of 10 feet, travelled 120 feet, and landed 12 seconds after takeoff. This was the first successful, powered, piloted flight in history. Prior to the breakthrough, the Wrights had spent a great deal of time observing birds in flight. They observed that birds soared into the wind and that the air flowing over the curved surface of their wings created lift. Eventually their efforts yielded results after a series of tests and failures spanning over three years from 1899. In November 9, 1904, the first flight lasting more than five minutes took place. Further tests and improvements led to the US Government buying it’s first airplane, a Wright Brothers biplane (speed, 64 Km/Hr) on July 30, 1909 for $30,000. There are many lessons to learn for entrepreneurs from the Wright brothers and the airplane invention.

Beautiful Risk

There are risks to any venture in life, business or project. On that I’m sure almost everyone is in agreement. What’s not of widespread knowledge or acceptance is the beautiful value that risks bring to entrepreneurs. The simple truth is that without risks, there is no business. No enterprise! Anyone who wishes to eliminate risks or obstacles or uncertainty in business is inadvertently wishing death for the business field. It is thus ironic that the concept of risk creates fear in the minds of many, including entrepreneurs when the opposite should be the case. For an entrepreneur to be successful, he must be able to deliver quality products or services to customers at the right price on a consistent and reliable basis. Reliability and consistency are not chance events but are rather products of creative thinking, thoughtful planning and efficient utilization of resources. Effective and efficient implementation of any business objective principally requires a thorough understanding of the various risks that lurk on the path of deployment. This understanding allows the business or project owner to proactively design cost-effective ways of navigating through the risky paths and emerge successful. The understanding of business risks only comes through formal or informal risk assessments and evaluation. Because many entrepreneurs do not understand the process of risk assessment or are too timid to deploy risk assessment practices to their business or project plans, many businesses fail or continue to make losses. These are direct results from the impact of the risks which hit them unawares as they are poorly prepared. But the few entrepreneurs who are grounded in the principles of hazard identification and risk assessment successfully cross the bridge to profitability. The interesting thing about business risks is that they’re responsible for the failure of many entrepreneurs who fail to recognize them while simultaneously representing the same factors that create a relative monopoly for the few who proactively assess and provide mitigating or preventive measures for the risks.

If all aspiring entrepreneurs practiced sound risk management practices, they’ll each succeed in creating equally sound and priced goods and services. When this happens, the market will be flooded with excess of everything. Under such conditions, there’ll be no competitive advantage for any entrepreneur leading to poor sales, no profits. Motivation for entrepreneurship will disappear. Because enterprise is a natural and instinctive endeavour, risks become the barriers that stop your competitors from doing exactly what you do or doing it as efficiently as your company, thereby creating the competitive advantage for your efforts to result in profits. It is for this reason that for you to run a profitable business, you should consider risks as your best friends because they keep your competitors down. If you treat them as valuable companions, you’ll make deliberate efforts to uncover their identities and develop strategies around handling them without wishing or hoping they did not exist.

The Airplane Analogy

Before the Wright brothers succeeded in the building the first aircraft, the laws governing flight have been in operation. It is the same laws that the birds, without university degrees, have been applying in flight. The inventors studied bird flight patterns to understand how to design systems that will overcome friction and air drag to enable man fly. They discovered the balance of forward speed, aircraft shape, weight and control required to cause lift and flight. During take off, a plane builds up considerable speed at maximum wing spread. While it is desirable in design for the airplane to navigate the risks of friction, air drag etc for flight, it is the same risks, (friction and drag) that the plane uses when it desires to land. In preparation for landing, an aircraft usually reduces speed, pushes out some wing parts at a sharp angle to increase air drag. The wide tires are also released to make contact with the tarmac to make full use of the speed reducing effects of friction (risk) between tire and concrete/asphalt coating. Without the drag and friction, although a plane on take-off minimizes their impact, for landing to occur, they must maximize the effects of the same drag and friction. Otherwise, once a plane takes off, it will not be able to land. Risks play the same role for entrepreneurs. 

Another observation is that the first planes had one or two passenger capacity and were not in any way like the aircrafts of today. The early speeds were about 60KM/Hr with no enclosures for pilots and passengers. Today’s planes i.e. military fighter jets, have speeds beyond Mach 4 (4 times the speed of sound). The Boeing 747-400 Domestic aircraft can seat 568 passengers and fly at up to a speed of 947Km/hr. If the Wright brothers’ focus was in starting with a plane that can carry 500 passengers and fly at 900 km/hr, they will not have succeeded. At least not in pioneering air travel as the challenge would have been too daunting for their experience and knowledge level at the time. Many aspiring entrepreneurs want to start their businesses at the Boeing 747 Jet level, well beyond their knowledge, experience and resource base driven by the greed of hitting the big breakthrough at the fastest possible time. My advice is to start small at levels of risk that you can understand, manage and control. Failures at such levels will not break you but rather serve as valuable learning and appreciation of the risks involved to develop a risk management style. Thereafter, you can scale up to higher levels. Otherwise, you may not be spared the consequences of such folly.

 Photo: 3.bp.blogspot

Photo: 3.bp.blogspot

Simple illustration. Let’s review a case where Mr. David, an entrepreneur who wishes to supply specialized pellets to a group of manufacturers who need these materials in large quantities. The end users of these pellets currently buy them at a unit cost of N20 each but the current suppliers in the market cannot meet the aggregate demand. Preliminary assessments reveal that the buyers consume these pellets in excess of N500m value annually and could use more if they can be guaranteed enough supply. David carries out preliminary investigations and finds out that using bulk purchasing methods, he can buy the raw materials for the pellets at N2 each (Equivalent) from Ghana. He was told that production costs for each pellet would not cost more than N5 each. He also has the option of importing the finished pellets from Europe at a unit cost of N9 excluding transportation, logistics, and other associated costs. David has no previous manufacturing or production experience but the production option appeals to him. For illustration purposes, we make a simple graphic to highlight the potential risks on the path of achieving his goal of profitably engaging in the supply of pellets to the manufacturers.

THREATS

Issues which if not protected against might lead to the Risk Event occurring

RISK EVENT

The risk event which the business owner must put adequate measures or barriers to prevent occurrence

CONSEQUENCES

The various consequences which might result from the risk event

Wrong information regarding cost of raw materials

Production Cost

Customers unwilling to buy at higher costs 

Raw material producers increase price based on surge in demand

Sell for less out of desperation to cut losses

Increase in transportation costs

Rising interest charges on borrowed funds

Stealing of raw materials in storage

Loss of highly priced assets through forced sale by lenders to recover loan

Poor estimate of implementing production factory project costs (Underestimation)

Adverse health effects (High blood pressure, heart-attack, stress, etc)

In-country inflation

Loss of reputation

Increase in alternative power supply costs (Diesel fuel + Maintenance costs)

Worker dissatisfaction leading to lowered productivity as a result of owed wages

Withdrawal of a major financier, forcing alternative sourcing of funds (higher cost of money)

Loss of credit facilities from suppliers

One way of minimizing the risk event from occurring is to do due diligence upfront. Careful market research, trending and data verification are some ways that will generate top quality information for decision making. People who disregard the all-important aspect of assessing and analyzing risks prior to committing significant funds into a project or enterprise end up paying a huge price for the mistake. Risks and uncertainties will always be there lurking round the corner. One should never allow the excitement inherent in a suspected opportunity to cover the fact that on the path of every opportunity lies a series of obstacles that ensures that only the best prepared makes it to the finishing line.  The fact that many people do not prepare well enough presents a wonderful opportunity to the very few who are ready to pay the price in preparation. Nobody likes to be taken for granted. Not even risks.

 

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