Risk you can afford

Training 965 minuteshow to assess business risk

You are 36 and run a burger food truck. Profit is $2,400 a month, family costs $1,600. You hold $4,800: three months of living. That is the cushion, and it stays off the table.

Training goal: Take only the risks you can survive

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Situation

1. A spot at a city festival: $1,500 upfront, no refund. Good weather (70% chance) brings $3,500 profit, rain brings $500.

Take the spot after checking the worst case
Take it and borrow $3,000 for triple stock
Pass, it might rain

2. A used second truck is for sale at $18,000. You have a cook. The forecast: $1,500 profit a month. Nearby, a truck rents month to month for $600.

Buy it: $4,000 from savings, $14,000 loan
Rent for a month and test the forecast
Pass, a second truck is a risk

3. Insurance against a major breakdown costs $90 a month. The chance is 10% a year, and repair plus downtime costs $7,800.

Skip it, on average insurance loses
Insure everything, even tires, for $250
Insure only the major breakdown

4. A new meat supplier offers 40% off for six months paid upfront. Meat usually costs $1,500 a month. You know nothing about this supplier yet.

Prepay six months: $5,400 instead of $9,000
Offer to prepay one month at that discount
Decline, new suppliers are untrustworthy

5. A year later you have $9,000. A kiosk near a busy station: $1,200 a month on a 5-year lease, $6,000 fit-out, and leaving early costs 6 months of rent.

Park nearby on weekends for $400, measure sales
Sign now, the spot is great
Sign, and take a loan for the fit-out

What you will learn

Start with the worst case: can the cushion survive it?
A positive average does not help if the downside ruins you.
Take reversible steps fast, irreversible ones after a cheap test.

Your real-life step

Take one big decision on your desk. Write the worst case in dollars and compare it with your cushion. Find a way to test it for 10% of the cost.

Questions and answers

How do you assess risk in a business?

Put the worst case in dollars, estimate its odds and the expected gain. If the worst case exceeds your cushion, shrink the bet or find a cheaper test.

What is expected value in decision making?

The sum of outcomes multiplied by their odds. For example, 70% of $3,500 plus 30% of $500 gives $2,600. It is an average, not a promise.

What are reversible and irreversible decisions?

A reversible one is cheap to undo: a monthly rental, a trial batch. An irreversible one is costly to undo: a purchase, a long lease. Make the first fast, the second after a test.

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Numbers are illustrative. A game, not financial advice.