Legal Structures and Dealing with Risk

Taking Risks

Many non-entrepreneurs want to believe that those who are entrepreneurs are also big risk takers. However, that is a myth. Entrepreneurs take the risk of moving from a job with a predictable paycheck to working a new lifestyle whose pay checks are a variable during the start-up phase. In fact, entrepreneurs are in the business of mitigating risks in order to achieve success.

In starting a business, there are many areas that involve degrees of risk, however the entrepreneur’s job is to utilize strategies to avoid or overcome known risks. In its simplest terms, risks are the threats to a business in achieving the organization’s business objectives. The following highlights the obvious risk areas, but other areas of risk may exist depending on the type of business and market place.

Business Function Risk Opportunities Risk Sources
Finance Not enough start-up funding, negative cash flow, theft, improper accounting, taxes, investments, weak market Accounting, management, customers, employees, the economy, poor corporate structure
Technology Unsecured corporate data, unsecured customer data, theft, knowledge loss, hardware theft, software theft, viruses/malware/spyware, data loss, hardware productivity loss Computers, lack of data protection, lack of data back-up, lack of technology maintenance, employees, identity thieves
Marketing Lack of viable market research to support sales projections, lack of a market for product/service, economic conditions, sales capabilities, poor market strategies Lack of a marketing plan, lack of market research, the economy, poor sales strategy or sales execution, poor product/service positioning, lack of planning
Management Poor leadership, no clear direction, employee discord, lackluster sales, theft, business failure, business growth CEO, board of directors, advisory board, employees, market, economy
Employees Theft, “brain drain,” missed deadlines, product flaws, vendor relationships, information leaks, lost productivity Employees, employee buy-in, employee representation
Disasters (natural or economic) Inventory loss, facility loss, data loss, man power loss, market decline, economic recession/depression Natural disaster (flood, tornado, hurricane, fire), Economic recession/depression, manmade disaster

Business Risk can be categorized in the following manner:

  • Financial – protecting monetary funds
  • Strategic – goals of the organizations
  • Operational – processes that operationalize goals
  • Compliance – laws and regulations
  • Reputational – public image

Risk Mitigation

Risks in business can be eliminated, accepted, transferred or mitigated. Every business must address risk management at some point early in the planning and start-up phase of the business. Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

Method – For the most part, these methods consist of the following elements, performed, more or less, in the following order.

  1. identify, characterize, and assess threats
  2. assess the vulnerability of critical assets to specific threats
  3. determine the risk (i.e. the expected consequences of specific types of attacks on specific assets)
  4. identify ways to reduce those risks
  5. prioritize risk reduction measures based on a strategy

Risk management should:

  • create value
  • be an integral part of organizational processes
  • be part of decision making
  • explicitly address uncertainty
  • be systematic and structured
  • be based on the best available information
  • be tailored
  • take into account human factors
  • be transparent and inclusive
  • be dynamic, iterative and responsive to change
  • be capable of continual improvement and enhancement

Continue onto Concept Analysis