There is an interesting paradox of business: those who avoid all kinds of risk, risk most of all.
Risks and responsibilities assumed by an entrepreneur are an integral part of any business activity. Being a necessary component of entrepreneurship, business risks arise every time a company introduces something new in its work. It doesn’t matter whether it’s a new employee or a new channel of sales. In essence, any action that leads to a discomfort is a risk.
Is there any way to turn the existing risks into certain opportunities? Of course, there is. Accepting any risk, one dedicates more time and efforts to overcome it. But after a certain period these efforts may generate a favorable outcome.
Get Ready for Business Risks in Advance
The main rule of the risk management is as follows: if a business runs well, get ready for the risky situations. When the company begins to accumulate the own capital, it is necessary to save money to create alternative ways of receiving income. It is a very good practice if an enterprise receives income not only from its main activity but also develops several alternative sources of income. In the event of a crisis situation, all efforts can be focused on the alternative directions.
Diversification: a Way of Mitigating Business Risks and Opportunities
In fact, if top management prepares for the diversification in advance, it looks more like an investment project and not like an action plan to combat the consequences of the crisis. Business owners should search for the additional sales channels or develop new products in order to invest free funds. In such way they create a platform for a further business growth.
Types of Diversification
Diversification by the types of activity
Such kind of diversification requires the company to operate in a variety of directions, that is, operational, financial and investment ones. A company may invest in the development of its own business or redeem a share of another enterprise.
In case of instrumental diversification, the company spends resources simultaneously on different businesses within a single type of activity. For instance, if it is a financial activity, then the company invests both in shares of other enterprises and in government bonds. A similar example is the opening of additional store selling some other products.
Foreign currency is a basis of this type of diversification. It implies you should invest in different currencies, i.e. both in dollars and euros. This diversification is especially promising when the company performs active international trade operations.
This is a kind of work when various institutions are the object of investing funds. Typically, these are different banks as well as investment programs.
It is required when the enterprise maintains active flow of funds. Then money moves through different payment systems.
Converting business risks into opportunities, it’s necessary to remember the following rule. Company should apply the diversification methods mentioned above if it is financed at its own expense. It is expedient to diversify production at the expense of the attracted capital only in terms of the sanation procedure.
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- Diversification of Business Risks: How It Works and When It Should Be Used