Entrepreneurial Risk-Taking Traits and Managing Uncertainties - Essay Example

?Impacts of the entrepreneurial risk taking traits and ability to cope with uncertainties on the operating environment of a small business The importance of entrepreneurship for economic development has grown over the past few decades. Entrepreneurship is perceived as a source of innovation, growth, and job creation according to Burns (2010, p.4-6). Nevertheless, conceptualizing entrepreneurship has not been easy because it has no generally accepted definition. Since entrepreneurship is linked to innovation and development of something new, it is treated to mean creation of new venture, and therefore, a business owner. As the owner of the business, an entrepreneur is also perceived as a risk taker. This is because all the decisions pertaining to the success or failure of the business lies with him. Despite this revelation, the Global Entrepreneurship Monitor in 2006 reported that many people in the UK are risk averse, with more than two-thirds of respondents revealing so. As many of businesses fail, such fears are well placed. Many businesses fail due to a number of reasons among them being lack of finance, poor infrastructure, shortage of skills and complexity of regulations or the red tape among others (Storey 1994, p.5-9). Nevertheless, the ability to evaluate the uncertainties and risks that are integral part of all businesses decisions is a vital element of successful entrepreneurship. For this to be accomplished, entrepreneurs must do their research properly to ensure that all reasonable steps are taken to mitigate any potential failure. This is because, the outcome of a successful risk taking result into a profitable venture (Timmons 1999, p.15-22). The objective of this paper is to explore how the entrepreneurial trait of risk taking and the ability to cope with uncertainty may impact the operating environment of a small business. Small businesses are said to be highly vulnerable to risks and uncertainties attributed to the fact that they operate under limited resources. Burns (2010, p.8-15) argues that small businesses are also confined within financial ability, and shortage of skills due to inability to employ highly professional staffs triggering mismanagement. The business also faces the challenge of failure due to many uncertainties. Because of these risks and uncertainties, small business entrepreneurs live in fear of failing to accomplish their goals of business success. It is, therefore, imperative that small business entrepreneurs must be vigilant to ensure that they do not plunge into the ‘pit holes’ of the business. Business expansion for instance comes with many challenges most of which comes as a result of lack of knowledge of new locations, and lack of the ability of manage large strategic, structural, technological and the human resource and the constrain of monetary base as well according to Rae (2007, p.10). Expanding the size of the business implies that more employees are required; more capital is also needed as well as the challenges of coping under the new business environment. Some of the risks and uncertainties that an entrepreneur must be aware of and device proper ways to manage them for the success of the business include: Financial constraints Entrepreneurs are definitely faced by the risk of inadequate finance especially when trying to expand their business venture. This is because no single business can be expanded without the need of more capital investment. Since the business is small, it may not be at a position to provide the more capital outlay required to meet all the business needs. As such, an entrepreneur must be at a position to take all the risks necessary to ensure that the probable financial needs are available. For instance, an entrepreneur should take the risk by borrowing the required finance from financial institutions. The other strategy that may be employed by the entrepreneur includes seeking a merger with other firms to help pull resources together for the success of the business. An entrepreneur with such a risk-taking trait will easily come out of such financial difficulties if the strategy is successfully implemented (Timmons 1999, p.15-22). Uncertainty exists here because the business is taking as new dimension. It has to be acknowledged here that borrowing may be technical for an expanding business since the business growth may not be able to realize in the near future, which is uncertain. It may also take several months or years for the effects of the business expansion program to be felt. This indicates that the loan that might have been granted is still unsettled in spite of a little growth. This may constrain the limited resource available further (Timmons 1999, p.15-22). Inadequate managerial strength It is seen that a business expansion program done without putting in place enough human resource to manage and run is more likely to fail due to inefficiencies and ineffectiveness (Burns 2010, p.22-28). Therefore, an entrepreneur must be able to factor the level and amount of manpower required to meet the challenges. It is noted that as business increases in size, more professional employees are needed as the business modes and structures broadens. Such a situation poses many uncertainties in case the business has no financial backup to allow for expertise and highly competent staff. Therefore, the ability of an entrepreneur to manage such uncertainties is very important for the success of the business. One of the strategies that may be employed by an entrepreneur to manage such uncertainty is setting a side a provision to cater for such uncertainties (Rae 2007, P.16-18). Setting aside some money for hiring competent staff will ensure that the business gets enough expertise and competent staff as and when required. Doing this will, indeed, cover the business from any eventual uncertainty leading to the success of the business. Limited understanding of the market Many small businesses are faced with the challenge of limited market understanding that more that often contribute to the failure of these businesses (Kuip and Verheul 2003, p.14-21). Therefore, ability to manage such uncertainties associated with the market is necessary. One of the strategies that may be employed by an entrepreneur to manage such risks and uncertainties is by carrying out a pre-business expansion research. This is because the best way to understand the market in which the business operates is through experience on the business portfolio in such a market. The entrepreneur should be very cautious when venturing into a new market. Due to the uncertainties, the entrepreneur should first test the ability of the business to survive and do well in such a new market. Once this research is complete, an entrepreneur as a risk taker may make a bold step and venture into the business having taken into consideration all the factors that may deter the business from succeeding. In fact most successful business ventures operate on this ground. Bad Debts The other uncertainty and risks that small business entrepreneurs have to deal with is the bad debts (Rae 2007, p.8-11). Bad debt poses a lot of risks to business as some debtors fail to owner their debts due to death, bankruptcy, or other reasons. However, as an entrepreneur who is committed to seeing success of the business must take all measures and risk necessary to handle all the risks associated with bad debts. One thing that is noted with successful businesses is that they must be able to offer some debts to their customers as an inducement. Therefore, an entrepreneur is obliged to offer debts to their customer despite the risk of default. What matter afterwards is the ability of the entrepreneur to cope with the uncertainty of default. As such, it is in order for the entrepreneur to put in place strategies aimed at dealing with such uncertainties associated with bad debts. One of the strategies involves making a provision for bad debts. This will enable the entrepreneur to run the business without any worry. Secondly, the entrepreneur may opt to insure some of the bad debts that may occur. Insuring will ensure that the business does not fail due to bad debts, as the insurance company will come in, in case a debt is declared bad and written off. Change in tastes and preferences Small businesses that deal in one particular consumer products such as bread, soft drinks, cigarettes, toothpastes among others encounter a lot of risks and uncertainties associated with changes in taste and preferences among consumers. Research reveals that many people have become more sensitive to their health and as such shy away from certain products that they used to purchase before due to health concerns while other avoid this products due to change in taste (Timmons 1999, p.15-22). Indeed, a business that is not prepared for such changes may fail due to lack of customers. However, proactive entrepreneurs must take the risks to counter these uncertainties. One of the risks that may be taken to counter the risk is through product diversification. This implies that entrepreneur should be able to cope with the uncertainly by diversifying his products so that the business does not only deal in one single product. This will ensure that the business continue as a going concern irrespective of the changes in tastes and preferences among consumers towards the products it has initially been dealing in (Carter and Jones-Evans 2000, p.56-68). This is based on the fact that the entrepreneur will still engage in the same or manufacture of the other products that still sell well with the consumers. In conclusion, having explored the extent to which small businesses are vulnerable to risks and uncertainties, it is imperative that an entrepreneur must possess risk taking traits and the ability to cope with uncertainties in the business environment for the business to be successful. Failure to have this traits and abilities only cast doubts as to whether the business can continue in the long run. Therefore, once uncertainty and risk has been established, the next thing that is to be done is devising strategies aimed at making such risks and uncertainties. The strategies include borrowing money from financial institutions, carrying out research on new market, insuring risks and product diversification among others. References Burns P. (2010). Entrepreneurship and small business: start up, growth and maturity. Basingstoke: Palgrave Macmillan. Carter, S. & Jones-Evans, D. (2000). Enterprise and small business: principles, practice and policy. Harlow: Pearson Education Ltd. Kuip, I., & Verheul, I. (2003). Early development of entrepreneurship qualities: The role of initial education. EIM Business and Policy Research. Erasmus University Rotterdam, June. 1-27. Rae, D. (2007). Entrepreneurship, from opportunity to action. Oxford: Palgrave McMillan. Storey, D.J., (1994). Understanding the small business sector. London: Routledge. Timmons J.A. (1999). New venture creation: Entrepreneurship for the 21st century. London: McGraw-Hill. Read More