The Business Plan and Risk
By Dr. Tsvika Ben-Porat. Author of the book Three’s a company – Man, Entrepreneur and Manager
To what extent does the business plan predict the level of risk in the investment? Can a business plan really answer the question of risk in a reliable and precise manner?
In every financial investment, the lower the risk is, the lower the expected yield will be, and vice versa. The higher the risk and uncertainty, the more true possibility to earn from it – and the more chance of losing all of the money. In situations of ‘purchasing risk’, the higher the risk is, the higher the possible costs.
In terms of undeclared aims, the business plan clarifies the level of risk involved in investment in this initiative. Risk cannot always be measured on a range from 1 through 10. It is not always possible to include a graph in the business plan that specifies that the level of risk in a scale from 1 (the lowest) to 10 (the highest) is 7.2 or 9. In most business plans the level of risk of the project or the business process is itself a mystery.
In every economy (and one may say in every economy on the macro-economic level worldwide) there are investors who avoid risk and investors that court risk. Governments, banks and insurance firms are considered to be investors that avoid risk. Venture Capital Funds, private investors and the like are prepared to take on a higher level of risk. The significance of avoiding risk is that these are bodies or factors that don’t like to be taken by surprise, don’t like things that aren’t planned for in advance, and are not able to accept answers that do not meet certain standards or that stray from a certain format. Those who have a higher tolerance for risk are prepared to be open to new ideas, new approaches, and different world views that are not uniform or standard. Investors, who are able to live with changing circumstances or highly uncertain events, understand that the higher the risk is, so the chances of earning more can be greater. These investors understand that great success does not come from avoiding risk. It is not possible to achieve an especially successful outcome without raising the level of risk.
Why then should the inventor be familiar with the subject of risk avoidance and the love of risk? Because when they come into contact with the representatives of those mentioned above, and prepare a business plan for them, they have to know whom to aim the plan at. It is likely that the entrepreneur will be required to make a presentation to governmental investors, and there as we have said, a business plan with a very low risk factor is required. On the other hand, among private investors a low risk factor could be considered a drawback.