Your most important business equation ever, is the one that shows you how much risk you carry

The business risk equation explains what influences your success in business (in every thing actually). Understand it if you want business success.

Risk = Consequence x Opportunity x Uncertainty

The most important business equation of them all is the business risk equation above, shown in its full form.

 


 

You probably already know that most businesses fail. Five years after start-up about a third of USA businesses are still in operation; under half of UK business survive; and about the same for Australian businesses. Ten years after start-up about ten percent of businesses are left. For society that is a good thing—only those businesses that satisfy a real need should remain. But for the business owner, their dreams of fortune and well-being often turn into financial disaster.

Those things that influence your success in business can be identified by using the risk equation. Knowing what makes a difference to your business success lets you focus on doing the right things to maximise your business survival rate. Let’s have a real close look at the business risk equation.

Risk ($/yr) = Consequence ($) x Likelihood (/yr) is the basic risk equation.

The risk equation says that your annual cost from a risk depends on what losses happen when the event occurs (the consequences) multiplied by the number of times a year that the loss event arises (the frequency). A loss event that costs you $10,000 when it happens (say a car accident), which happens twice a year (i.e. two accidents in twelve months) means you lose $20,000 from the risk of road accidents per year.

However, the basic risk equation is incomplete. There are two parts to Likelihood: opportunities per year for the event to arise, and the degree of certainty that disaster will happen at each opportunity.

Risk ($/yr) = Consequence ($) x [Opportunity (/yr) x Uncertainty at Each Opportunity] is the full risk equation.

If there are zero opportunities for an event to happen your risk is zero (e.g. if you never take a car on the road you cannot have a road accident). If the uncertainty is zero (e.g. you never have a car accident when you drive on the road) the risk is also zero. Both business opportunity and business uncertainty are factors that you have a lot of control over in your business.

When you are in business the consequence for you is to either make money or not to make money from trading with prospective customers.

Maximising the number of opportunities to get paying customers is called Marketing Management.

Minimising the uncertainty in losing a sale to an interested prospect (or maximising the certainty of gaining the sale) is called Sales Management.

To reduce the risk of going out of business you need to be very good at Marketing to get paying customers, and very good at Sales to get those customers paying you.

This explanation of how to use the risk equation to get business success brings with it a realisation that the production and delivery of your products, goods and/or services is actually a Sales function. You will maximise your sales if your products and services satisfy prospective paying customers. The quality, performance and cost of your product or service influences customer choice—the sales uncertainty reduces when your customer gets high quality, a reliable product, and a price that they can afford.

Creating opportunity for paying customers to find you is in your control. You need to get better at marketing to find paying customers.

Improving the chance of sales success by removing uncertainty in a sales encounter is in your control. You need to work on producing a product or service that is valuable to paying prospects.

Take half an hour now and on a blank sheet of paper list all the marketing opportunities that you can create, and all the sales uncertainties that you can remove. Once you have the list, put your options in order of likely success and start to remove the risk of failures from your business.

All the best to you,

Mike Sondalini
Director
Lifetime Reliability Solutions HQ