Risk Management

Risk Management

Starting a coffee shop or other business definitely has risk involved. Some sources say 50% of small businesses fail in the first three to five years. How do you not become a statistic? There’s no saying for sure, but a good place to start is with strong business planning and risk management.

Risk Management

It’s said starting a business isn’t necessarily about taking risks, but managing calculated risks for the purpose of the greater value. It comes by identifying potential risks and brainstorming how to creatively remove them through planning. Examine all of what could go wrong to develop safeguards to these challenging and dangerous scenarios. Ask yourself how you would overcome these challenges should you encounter them. Here are some basic things to think through as an aspiring coffee shop owner:

  • Should you own your own business? Are you prepared to put in the time and effort needed to build your business, learn the skills you’ll need, and make the sacrifices to be successful? Talk to coffee shop owners to get the realistic end of what it takes to run a shop. And I’d highly recommend having worked in one to break the romantic mindset of what having a shop can appear to be.
  • Do you know your market, including the current and upcoming trends, and how they’ll influence your business? How are you positioned to meet these trends?
  • How strong and focused is your business concept, especially against competition? What will make you successful and different from others?
  • Do your products appeal to your specific target market? Is your line focused, or are you trying to sell all things to all people? What is the need and unmet market group you’re aiming to fill?
  • Are you financially set? Do you have enough start-up capital to fund your business? Andrew Hetzel from Coffee Strategies goes into the point that the top two reasons for failure are management inexperience and insufficient capital, so if your funds are below what you need to succeed, you should another source of funding, otherwise changes of failure highly increase. He adds,

“There is a chance that you will -get lucky- but remember that this is an investment, not a gamble.  Smart entrepreneurs knows how to manage risk versus reward.”

Other common risks include a poor location or too high rent, a poorly designed coffee bar, under budgeted build out costs, poor staff hiring and training practices, poor management, diminishing quality, poor customer service, poor marketing, and low cash flow to cover operating and marketing costs. Luckily all of these are covered in the Business Plan, which is why it’s good to take time to think through them.

Don’t be afraid to face this statistic and see where you stand in light of these factors. Arming yourself with knowledge and experience the best you can will help against the basic unknowns mentioned above (though there will always be unknowns). Start with getting your feet wet in the industry, working at shops, gaining experience, and talking to owners and the like. Determine whether it’s for you, your strengths and weaknesses, and if you’re up for the challenges — or if you’d rather turn a blind eye.

Think through uncertainties- starting with the most important ones:

  • Deal killer risks- undermine the entire business. They come from unexamined assumptions, and failure to spot these can doom your business.
  • Path dependent risks- happen when choosing the wrong path or priorities can waste time, money and resources. Failing to spot this raises the odds of running out of money before you’ve built a brand and become profitable.
  • Easy win, high ROI risks- are quick and easy to resolve without spending too much money. Otherwise they may cause a temporary setback, but can lead to a larger obstacle over time.

Identify and prioritize your risks, and set on resolving them with a set time limit and budget. Don’t rest on assumptions, but challenge yourself by thinking through the obstacles and coming up with a plan to overcome them. The business plan will help minimize risks before you’ve begun, and proceeding with due diligence will help with practical safeguards through permits, licenses and insurances through the course of your venture. Check out the sources below for articles and a place to start on this topic. And as always, I’d love your input below, especially if you have experience in the matter!

Sources & Good Reads:
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