What Makes a Business High or Low Risk and How Do You Know Your Risk Tolerance?
- Your Compass
- Apr 27
- 6 min read
Updated: Aug 20
1. Introduction
Talking about business risk is supposed to be serious, but over years in business and finance, I've enjoyed these conversations over coffee. Let’s make it fun and explore the real value behind it.
Starting a business is an exciting venture, full of potential rewards, but it also comes with a range of risks that can affect its success. From financial losses to operational challenges, the level of risk associated with your business can determine how smoothly things progress and how resilient you need to be as an entrepreneur.
In this blog post, we will break down business risk, explore how to categorise businesses as high-risk or low-risk, and discuss how you can assess your personal risk tolerance. Whether you're planning to launch a pet grooming service or embark on a tech startup, understanding the factors involved in business risk is crucial to making informed decisions.
By the end of this article, you'll have a clearer understanding of:
The different types of business risk.
How to categorise businesses based on their risk levels.
Key factors that influence business risks.
How to evaluate your personal risk tolerance to choose the right business for you.
2. What Is Business Risk?
Business risk refers to the possibility that a business may not achieve its financial goals or face setbacks that could hinder its success. These risks arise from both external and internal factors. External risks include market fluctuations, competition, and regulatory changes. On the other hand, internal risks come from within the business, such as management decisions, financial mismanagement, or operational inefficiencies.
Let’s break down some of the key types of business risk:
Financial Risk: This occurs when a business faces uncertainty about its cash flow, profits, or ability to cover its financial obligations. A tech startup with significant initial costs and uncertain revenue streams is an example of a business with high financial risk.
Operational Risk: This includes risks arising from internal processes, systems, or human resources. For example, if a restaurant consistently faces challenges with staffing or supply chain issues, it increases operational risk.
Strategic Risk: This refers to the risks a business faces when it makes poor decisions regarding its strategy or market position. A business that chooses a saturated market without differentiating its product or a niche market without sufficient demand may face significant strategic risk.
Market Risk: A business operating in a volatile or highly competitive market is exposed to market risk. For instance, the fashion industry, known for its fast-changing trends, can lead to high market risk.
Example: If you start a tech startup, you may face risks related to market adoption (will customers use your product?), development time (how long will it take to get the product to market?), and competition (how many other companies are offering similar products?).
Managing business risk involves understanding the types of risk your business is exposed to and planning ahead to mitigate them.
What type of business risk are you most comfortable with?
Low Financial Risk
Moderate Financial Risk
High Financial Risk
I’m not sure yet
3. Key Traits of High and Low-Risk Businesses
High-Risk Businesses:
Unproven Models: Businesses operating in new or emerging markets (such as cryptocurrency businesses) are high-risk because their market demand is uncertain, and the long-term viability of the business model is still unknown.
High Capital Requirements: Some businesses require large initial investments, such as construction projects, restaurants, or manufacturing plants. These businesses may offer high rewards but carry significant financial risks due to the large upfront costs involved.
Regulatory Instability: Industries such as cryptocurrency or financial services experience rapid regulatory changes. This means businesses in these sectors must adapt quickly to new regulations, which can impact operations and profitability.
Market Dependency: Businesses like fashion or seasonal events are often highly dependent on trends or specific timeframes, making them more vulnerable to fluctuations in consumer demand.
Example: A cryptocurrency startup may be appealing due to its potential for high returns, but the fluctuating regulatory environment and market uncertainty make it a high-risk business.
Low-Risk Businesses:
Steady Demand: Businesses that meet consistent, ongoing needs, such as handyman services, personal training, or grocery stores, generally have stable demand and are less vulnerable to economic fluctuations.
Low Startup Costs: Many service-based businesses or consulting ventures require minimal capital investment, making them less financially risky than industries that need heavy machinery or large infrastructure.
Predictable Cash Flow: Subscription services like gym memberships, streaming services, or maintenance contracts tend to have predictable cash flow, which lowers financial uncertainty.
Minimal Competition: Niche businesses with low competition can be a low-risk venture if the market is underserved.
Example: Handyman businesses often have steady demand, especially in suburban areas, where property maintenance is a continual need. Since the startup cost is relatively low (tools and marketing), it can be a low-risk business.
4. Key Factors for Categorising Business Risk
Market Risk Factors:
Industry Stability: Some industries are more volatile than others. For example, the tech industry is known for its rapid changes, whereas industries like healthcare or education tend to be more stable.
Competition: High competition in an industry often increases risk. However, if you’re targeting a niche market (like specialty pet products), the competition may be less intense, reducing your risk.
Operational Risk Factors:
Business Model: Simple business models, such as consulting or freelancing, usually carry less risk than complex models like tech startups or manufacturing, where operations require more coordination and resources.
Team: Having an experienced and reliable team can reduce operational risks. Conversely, a one-person operation may face challenges due to a lack of expertise in various areas.
Financial Risk Factors:
Capital Investment: A high capital investment increases financial risk. Industries like restaurants or real estate development have high capital costs and often take years to become profitable, whereas businesses like online consulting have minimal initial investment.
Cash Flow: Predictable and recurring revenue can help minimise financial risk. Businesses that rely on one-time purchases face the risk of inconsistent cash flow.
Legal & Regulatory Risk Factors:
Compliance: Industries such as healthcare, food services, and financial services often require strict adherence to regulations. Failing to comply can result in hefty fines or even business closure.
Liability: High-liability businesses, such as construction or childcare services, face risks from accidents, lawsuits, or potential damages.
5. Assessing Your Personal Risk Tolerance
Your personal risk tolerance is a measure of how much uncertainty, loss, or failure you’re willing to accept in your business journey. It’s essential to assess your risk tolerance before starting a business, as it will help you choose the right venture for your financial and emotional well-being.
Factors Influencing Personal Risk Tolerance:
Financial Stability: If you have a stable income or savings, you may be more comfortable taking on higher risks. Conversely, if you're financially stretched, it may be wise to pursue low-risk businesses.
Emotional Resilience: Entrepreneurship involves highs and lows. Consider whether you’re emotionally prepared to handle setbacks or failures, especially in high-risk ventures.
Time: High-risk businesses (e.g., tech startups) often require significant time before becoming profitable. Can you sustain your lifestyle while your business is in the early stages?
Experience: Entrepreneurs with experience in their industry can better navigate challenges and make informed decisions, which reduces the personal risk associated with starting a business.
6. Industries with High Regulation in Australia
In Australia, certain industries are more heavily regulated, increasing both the complexity and risk involved. These businesses require entrepreneurs to stay on top of legal requirements and compliance.
Healthcare & Medical: Healthcare businesses in Australia must adhere to strict privacy laws, licensing requirements, and safety standards. Failing to comply can lead to severe penalties.
Financial Services: This sector is heavily regulated by bodies like ASIC. Offering financial advice or services without the proper licenses or compliance with anti-money laundering laws can result in serious legal consequences.
Construction: The construction industry is subject to various local and national regulations, including building codes, safety standards, and environmental regulations. Non-compliance can cause delays and fines.
7. Conclusion
Understanding business risk is essential for making informed entrepreneurial decisions. Whether you're drawn to a high-risk, high-reward startup or prefer the stability of a low-risk business, it's vital to assess both industry risk factors and your personal risk tolerance.
By evaluating financial, emotional, and time-related risks, you can choose a business that aligns with your goals and resources. Always ensure you have the necessary expertise and support systems in place to navigate the regulatory and operational complexities of your chosen industry.
Take the time to assess, plan, and decide wisely before diving into any business venture!
Understanding your risk tolerance is just the beginning — aligning your business strategy with it is what really matters. That’s where business consulting support can make a difference.
Additional Resources:
business.gov.au – Offers resources on compliance and licensing for Australian businesses.
ASIC – Provides guidelines for businesses in financial services and compliance matters.
NSW Fair Trading or Consumer Affairs Victoria – Essential for construction, food, and service businesses.
