1.2.5 Taking a calculated risk You have two options available to you: Option 1 I will give you £1m today Option 2 Take £1 and double it every day for a month (30 days). After 30 days I will give you whatever the figure is. Which option will you take? Why? What does it depend upon? Option 2 is worth £1bn 1.2.5 Taking a calculated risk 1.2.5 Calculated risk

THE PRINCIPAL OF TAKING A CALCULATED RISK A calculated risk is an action undertaken by an entrepreneur because the reward is greater than the risk involved. All decisions made involve an opportunity cost but some decisions hold more risk than others. Investing £10 000 in a new machine may entail some risk. Investing £200 000 in a new factory may see the business go under. Alternatively, it may see the business flourish with a dramatic increase in profit. The entrepreneur has to weigh up (calculate) the pros and cons of each decision made. The more the pros outweigh the cons the more likely the risk is worth it. 1.2.5 Calculated risk 2

WEIGHING UP RISK AND REWARD Each individual is different. Some are prepared to take greater risks than others. In the banking industry we have seen individuals make millions from taking calculated risks. They have also lost millions! However, they are playing with investors money rather than their own. If an entrepreneur gets it wrong the outcome could be dire – losing their house, job and all of their assets. Duncan Duncan’s mother had three children. The first was called April. The second was called May. How much money would you be prepared to put on the name of the third child? Was the risk worth it? 1.2.5 Calculated risk 3

WEIGHING UP RISK AND REWARD Weighing up the risks and rewards of a new business idea is an important part of the process of judging the outcome and viability of a start-up. One method of weighing up is through the use of a weighted pros and cons table. Should I go surfing this weekend? Pros (Weight out of 5) See friends (5) Enjoy surfing (3) Fresh air (2) Cons (Weight out of 5) Expense (2) School work (3) Weather – rain! (2) Based on this – I would like each of you to create your own example for an option you have. This provides a calculated view as to whether to go surfing or not. I can now make a judgement. Yes! 1.2.5 Calculated risk 4

WEIGHING UP RISK AND REWARD Small businesses will have to look at the weights on each pro and each con before deciding to go ahead with a new idea. Often, individuals go ahead with an idea without weighing up the consequences. Therefore, their judgements are poor. In the next few years you will be making some important decisions. What A Levels will you take? Will you go to University? Consider the pros and cons of going to university. These could include decisions on your: finance, social status, sports life, personal life, career aspirations, academic studies etc. Weigh up the pros and cons of going to university. Give a weighting to each pro or con. Will you be going to university? 1.2.5 Calculated risk 5

MISTAKES ARE PART OF THE LEARNING PROCESS Of course, we all make mistakes! One of the major reasons why some entrepreneurs are successful is that they have been failures Learning lessons from mistakes made is important in business as well as in life Advice from Richard Branson – It’s not personal! What are the biggest mistakes that you have made in life? Did you learn the lessons from your mistakes? Has it helped you in life? 1.2.5 Calculated risk 6

MULTIPLE CHOICE 1. Which two of the following would be a major risk for a new business start-up Select two answers □ A Knowing the difference between income tax and national insurance □ B Not having an established brand name □ C Reduced demand for products in the market to be entered □ D Recruiting too many temporary workers □ E Increasing competition from foreign businesses 1. C 2. E 1.2.5 Calculated risk 7