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The most underutilised ratio in business decision-making

The answer is not some financial ratio you might have learned while studying business. Quite simply, when facing a major decision, stop and think, 'What is the risk-reward ratio?' What do you gain if everything works out perfectly, and what do you lose if it becomes a disaster? I use this with my business partner when building our business over its 20-year lifespan. I also use it when deciding whether to start my own business or even some highly personal decisions.

 

Sometimes, this ratio is easy to quantify. For example, do we want to buy extra inventory for a possible 10% margin improvement while risking a near 100% loss if we have that inventory over Christmas? Do we want to invest a large number in new systems that might disrupt the business dramatically if hiring another pair of hands might cover the gap for now?




 

The most important aspect of the risk-reward ratio is not necessarily the numbers themselves; it recognises an absolute risk involved. Feel the fear and do it anyway? No thanks, coach! Analyse the risks and decide if the potential rewards outweigh the real risks that things might go badly, even disastrously! Now, I am an optimistic, sales-oriented entrepreneur. I am not opposed to taking risks, but I want to be clear about what they are and be comfortable that, looking back, it was a sensible, not a reckless, bet! As a business advisor, sometimes my role is to play 'Chicken Little' because analysing a situation from both sides can be very difficult for even the most successful entrepreneur. #businessdecision #entreprenur #businessadvice

 

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