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How much risk is too much?

Discussion in 'Starting Your Business' started by Federico.Gimeno, Mar 16, 2016.

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  1. Federico.Gimeno

    Federico.Gimeno Member

    Hi fellow entrepreneurs,

    I've had a business idea running through my head for quite a while now, but part of me does not want to carry on with it because it might be too much risk financially speaking.

    I want to buy a car to get into a private transportation service (Uber like) as an associate, but buying it will cost me like 80% of my total savings, if something goes wrong, I may not be able to recover easily.

    What do you think, is it too much risk. What would you do?

    T J Tutor likes this.
  2. T J Tutor

    T J Tutor Member

    When doing risk assessment, the first thing you have to do is set aside that which is required for yourself. Included in what is required for yourself is the cost of living for six months. If you have not yet attained that in your savings, then investing is not typically a good idea. you have to invest in yourself before you invest in anything else.

    If you have six months of living expense saved up, then typically no more that half of the remaining amount is generally considered capital for investment.

    Note: While six months is considered acceptable, many consider a full year set aside for living expenses.
    jewelraz and Nancy like this.
  3. Federico.Gimeno

    Federico.Gimeno Member

    Good point,

    First thing I may do is calculate in a precise way the expenses I do monthly, and then aim to save up the amount for say, 9 months. This will give me some breathing room in case something goes wrong.

    Great advice, it's so important that I don't know how could I not think about it in the first place :). Thanks.
    T J Tutor likes this.
  4. Nikita

    Nikita Member

    I would personally always just trust the calculations. If you feel as though the investment would put your well being at risk then it might be too much to risk and it might be better off being put on hold. As a good measure I'd only risk what I feel is renewable. For example, I'd only risk the amount I know I could make back elsewhere if it turns out that the business I am making will take too long to pay out, which minimizes my risk of sacrificing too much of my daily comforts.
  5. remnant

    remnant Member

    Well, I have experienced such dilemmas and they are the rule rather than the exception. It is a thought mechanism at work to forestall risk. The best enterpreneurs are risk takers though the magnitude of the risk differs. If you decide to commit 80% your savings, you should ensure you have a fallback position should something go wrong. For example you can move your business horizontally to a related area or go into a partnership or franchise arrangement with an established party in that area of investment. This is called a plan B to extricate yourself if things don't work out. This works for me any day.
  6. djentre

    djentre Member

    Monetary Risk: If its more than 80% of your savings, then its too much risk.
    I agree, you need to have your emergency fund in place. But, beyond that, you need to find other ways to do this. Perhaps you can find someone who'd be willing to split the initial costs with you.
    Also, you need to make sure you have the numbers down when it comes to profitability. I know some guys who pick up people in and around a particular place like a university or something, and don't drive too far off. Will you be doing short runs or long distance? Because financially you'd need different strategies.

    Knowledge related risk: Do you know everything there is to know? Instead of answering this question yourself, go around asking your non-entrepreneurial friends. The ones who keep telling you why something won't work. Write down what they said and turn those statements into questions - what if there is an accident? what if you run into a crazy customer? And so on. Is there some political BS involved (becaue there usually is unless you're working for uber). Then find solutions/answers to those questions. Insurance, dashcams, etc etc. Find out legality of the things you're planning too. Most businesses don't fail because of lack of money, they fail because the entrepreneur did not understand the field/niche/career well.

    Exit Risk: Even if you do make a lot of money, there may come a time when you may want to leave. What's the exit strategy? Will you be selling the vehicle? What's the kind of bank balance that would make you want to leave? Exit risk means can you really exit easily or will it be a headache?
  7. Corazon

    Corazon Member

    If your heart is into that business, that investment of 80% of your savings is good enough since the car will be there to recover from when the business doesn't lift off the ground. And although the value of the car is less than that 80% investment but maybe the market value will not fall below 50% of your savings.

    My first business venture required a small structure in front of my husband's ancestral home. The investment was more than our savings because we borrowed money. And when the business failed, we were left with that structure. Fortunately, we were able to rent it out and at least recoup some of our investments.
  8. jona

    jona Member

    The car is just part of the equation, after your purchase, if you want to be an Uber driver you have to take some fixed costs into account: gas and insurance, you will definitely need some form of insurance since you are putting your entire savings into that car.

    I have no idea how much an Uber driver makes, but you have to run those numbers taking into account that you will not have job security, you can't call in sick, if you come with a nasty flu you will simply not get paid. What would happen to you if you are out of circulation for 3 weeks because you broke a leg?

    Also, please make sure that you qualify as an Uber driver before buying the car, I don't know what kind of pre screening they do, but even if yo manage to get the position remember that they can kick you out anytime if the passengers give you low ratings.
    Federico.Gimeno likes this.
  9. Vinaya.Ghimire

    Vinaya.Ghimire Member

    Warren Buffet's take on risk is: don't take risks with both legs in the water.

    This statement can be interpreted as you should never take a risk that you cannot afford. If $100 is all you have, do not invest it all and risk the money, however, if you use $25 that's a idea.
    Federico.Gimeno likes this.
  10. Nancy

    Nancy Member

    I would not recommending risking that much! I totally agree with @T J Tutor. You need a safety net of at least 6 months' worth of expenses in savings (and no debt) to be in a safe financial place.

    There are always alternatives :D Can you buy used? Work for someone else doing this for a while to test out the market? Brainstorm!! No idea is too crazy to consider!!
    Federico.Gimeno and Dilof like this.
  11. doodles67

    doodles67 Member

    Actually, only you can determine the amount of risk you are willing to take. The minimum amount of savings you need is at least six months.

    If it were me, I would judge the risk with this question: if the business fails, would you be able to make the payments on the vehicle or rebuild your savings? If you would not be able to do either, you will need to see if an alternative vehicle would work for your business.
  12. djentre

    djentre Member

    Yeah. I wouldn't go too crazy. And I would definitely not make any decisions while I am highly excited about something because that would make me make a biased decision and business decisions must not be biased (at least if I can help it).

    But everyone has different risk taking ability. Just make sure you don't risk more than what you can afford to lose.
  13. acheno84

    acheno84 Member

    Oh I've learned this lesson the hard way. Being passionate and excited about something, and then being totally disappointed and financially unstable because it didn't work out.

    My advice is to look further into the program. I too looked into being an Uber driver, but found that it's extremely popular in my area, and there are so many people that are registered that it would be very difficult to depend on that as a source of income since I worry that the calls will be far and few between. Anyway, regarding your money, definitely have more saved up. Make sure that you can carry yourself for as long as possible should the need arise. Either way, I wish you the best of luck.
    djentre likes this.

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