592 | How to Calculate Risks and Rewards in Business

Introduction (oo:oo:oo)

Every day, leaders decide what to do and what not to do. But how do we know if we're making the right decisions? That is coming up next.

Welcome to the Chris LoCurto Show where we discuss leadership and life and discover that business is what you do, not who you are.

Welcome to the show, folks. I hope you're having a fabulous day wherever you are. Today we are diving into the critical, yet often challenging topic of how to calculate risk and rewards in business.

Now, I will tell you that I am somebody who enjoys taking calculated risks. I am not somebody who enjoys taking a lot of risks that I have no idea how it could potentially turn out.

That's just not me. I'm somebody who likes to be able to be on the edge. I raced for many years, raced in my younger years in skiing. I raced in later on in life in formula cars.

I enjoy that kind of stuff. But I always had an understanding of what could happen. What could the benefits be? What could the, you know, what disaster could fall upon me, right? Those types of things.

I love taking a risk if I know that the benefit can definitely outweigh any possible negative effects and that I've got my backside covered.

So we're going to dive into that today, whether it's financial investments, whether it's leadership decisions, and we're going to kind of explore some strategies for evaluating potential outcomes before making important business moves.

So in my mind, every risk that you take that potentially has a negative outcome, you should be calculating what that is as well as what the reward could be.

Understanding Types of Risks and Rewards (00:02:09)

So I'm going to kind of run through some different types of risks, some type of, you know, rewards as well. Think of things like financial risk.

That's an easy one. That's not a difficult one for people to, to think about, to understand if I'm going to take this risk on, if I'm going to do this thing, whatever it is, how is it going to affect me financially?

If I'm going to make a business decision, what is that going to look like? How much is it going to cost? What are the expenses? What are their discounts on this thing?

Is there benefits to some other area in my business? You know, so whatever, you know, could I have a great windfall if everything worked?

What about a cultural risk? You know, maybe I'm bringing somebody onto the team that might not be a great fit, which I suggest against doing that.

But I will tell you, there have been plenty of times in the past when I, because I have a strong team that I have brought somebody in who was down on their luck, somebody who's struggling, somebody who needs to put food on their table and brought them in for a time period onto the team.

Did they necessarily fit culturally? Not 100%. Did they stir some things up? Usually, because somebody who's in that position tends to.

Yes, but having a strong team allows the team to lead that person to success, to understanding culture, to understanding hard work, to understanding expectations.

So a risk could be, you know, bringing somebody into your business that affects your culture. I highly suggest against it, you know, if they're a cultural fit, great. Fantastic.

So be thinking about those things. But this is an area that, you know, each time in the past that I've done this, I've really, really calculated.

Taking a look at the team that I have, taking a look at how it could affect things and made the decisions, I will tell you, currently we're not doing that.

Currently we are decently remote, all of them, not just all over the country, but all over the world. We have lots of remote working people.

And so it would have to be a special situation for me to work on that because the strength of the team is what also influences, you know, that that person.

So currently we're not doing that, but I've done that many times in the past. What about operational risks?

Maybe I'm making a decision to put on a new product or a new service or something like that, and it's going to require a decent amount of the current staff that I have.

Well, if you don't calculate that well, what you might discover is you actually pull energy away from the thing that's currently making you money.

Is that a bad thing? Yes, because that could tank the thing that is making you money. So if you don't calculate that, you might affect the operations of your current business or current model.

What about the market? You know, what if I bring something to market that nobody wants? What if I bring something to market that is not ready yet? What about reputation? You know, if I do this thing, does it affect my reputation?

If I do something that's edgy and the people that are my clients don't like it, that could not only affect my finances, like culture, operations, market, everything, but it could really tank my reputation as well.

So strategic risks, what if I have a plan of accomplishing, you know, the visions that I have in place? I've got strategy to those visions.

We just finished up two StratPlans recently with great clients and put things in place to say, here's how you're going to go accomplish those visions with these strategic plans that we're putting in place.

What if one of them decides to add a brand new vision and it tanks their current strategic plan? What if it tanks the things, the efforts that they're putting forth right now?

What if it affects the team members that are trying to operate in that strategic plan? Well, these are risks that you have to calculate, right? What if it helps out?

You know, one of the things that we talk about in StratPlan is, you know, if we accomplish a good portion of this faster, could we put more energy towards the other aspects and accomplish the whole thing faster?

You know, things to be thinking about. What about rewards? Now, obviously, financial gain is a great reward. That is a. As a business owner or leader, that's always something you're looking for.

You know, any decision that you make, you're usually hoping that this has some positive effect on the financials. Not every decision, obviously, and not every decision should be about finances.

So much of our decisions are about helping people, you know, worshiping God and helping people.

So a lot of our decisions actually might not have a financial gain to it. It might just be helping somebody out, which I believe in the long run, God's going to bless us with that.

Anyways, what about cultural rewards? Maybe bringing somebody into your team that's going to stretch your team, that's going to push your team, that could have, you know, the risk is that it could affect your, your culture in a negative way, maybe for a period of time.

But if everything goes well, maybe it lifts your culture. I don't know. It's very possible, right. Things to be thinking about, you know, is there a reward of market expansion if we do this well, do we grow our market?

What about increasing our efficiency, putting things in place that, you know, definitely are a risk? There is a risk to it, but if it goes well, the reward might be that we are so much more efficient that now it's affecting everything in a great way.

Our morale, our culture, our finances, all that fun stuff. What about brand enhancement? Now, I know a lot of folks following the show don't actually think about their branding, right?

Because branding is something that you don't focus a lot on unless you've got a good amount of money, you've got a really good position, you need to spend some money, you can do it in a way that brings more recognition to your brand.

So what does that look like? You know, that could be a great reward if people start following, becoming clients, you know, making purchases. But, you know, there's a great risk there.

What if you spend a lot of money and you didn't reach anybody. It did do anything whatsoever. So things to be calculating as well. What about strategic growth?

If we're looking at these visions of what we're trying to accomplish, and some of it may be our full on plan is to grow aspects of the business, the whole business, the whole team, whatever it is, that could be a reward that pays off really well.

So what is an example of all this? Well, what if you're launching a new product?

What if you're considering taking a, you know, you have a new product, you, you've already got things that you're doing, products, services, whatever, and you have a new product idea.

Well, you should be considering every aspect of the financial return. You should be looking into how much is it going to cost? How much, you know, are we going to do upfront?

Now, I'm always going to tell you, I'm not somebody who does debt. So for me, I'm going to fund this thing, I need to know how much it's going to cost for me to do it.

If I don't have enough money, then I'm not going to go big. Right. People always want to launch their product ideas on this massive scale, and that's why so many folks go into debt and it affects them negatively. Right?

So for me, I'm going to be how much money can we put into it? How much is it going to cost? What if it doesn't take off right away? You know, how much is it going to cost us to keep this thing going until it does fill a pipeline or something? Right?

Until enough people have purchased, how many dollars are we going to have to spend getting in front of not only all of our clients, but I, everybody else that we can get in front of that would align with this product.

You know, these are all things you need to think about when it comes to your financial returns, your, your expenses, you know, what kind of market share does it gain us?

So if we put out a new product, does it bring to us a larger aspect of our market, right. That we now have, we can point to other products as well. Right. What about the market rejection? What if we put this out there?

Our people don't like it. Nobody likes it. We spent the money on it. Does it actually affect our current stuff? Right? Do we lose reputation and lose loyalty? Because maybe we put something out there that nobody likes. So things to be thinking about.

Steps to Calculate Risks and Rewards (00:11:12)

So how do we go about calculating risks and rewards? Well, the first thing you have to do, no ifs, ands or buts, about it. You have got to sit down and you have got to define the decision that you are making and apply to it, the entire scope, every aspect of it.

You have got to spend an incredible amount of time gaining quality perspective. What does it look like? How much is it going to cost?

What parts are going to be involved with this? Who's going to be doing stuff? What's the timeline that we're expecting? Right. You got to go through and collect relevant data.

Don't just go off of the hopes, the ideas, the dreams. You know, the people tell you that they think it's a great idea.

You got to get relevant data. You got to conduct market research. You got to gather insights, not just from family members and friends. You've got to get insights from industry experts.

You know, whether they think it's a smart thing if they've used products like this before, what their experience has been, what user feedback has been like. You know, let's say you were going to invest in a new software tool like Searchie.

Searchie is a great new tool that's out there. Well, you got to spend time researching similar companies. You know, what are they doing? What is this company doing? What are the experiences with the software?

What's the potential ROI? What do the users think? Do they love it? Do they hate it? What's their experience?

So a ton of relevant data must be produced before you ever make this decision. Not just family, not just friends.

I can't tell you how many people I have known over my life that were great cooks. You know, you've got the, the, the mom, that's a fantastic cook, and everybody tells her, you've got to go open up a restaurant.

You're such a great cook. We love your food. All this, she goes heavily into debt. I'm, I'm not kidding. I'm telling you of things that I know of things that I've experienced.

You know, $300,000 worth of debt gets a storefront, gets all the products, all the tools, all, everything to make the food, unlocks the front door, puts the sign on, says, we're open.

And nobody shows up because she has absolutely no idea how to market and nobody knows that she's there, and nobody knows that she has great food.

And within a handful of months, she's closing down and has this huge debt bill, because she didn't know anything about marketing. Right?

These are things to be thinking through. You know, that is a part of the risk reward.

If I don't know how to market my product, does it really matter that I have a product, or instead of going $300,000 in debt, maybe I take some cash and I start to push it out there slowly and build a following. All right.

Start getting people to buy into this, this product idea that I have or this service idea that I have. So you've got to spend time. You have to make sure that you're gaining quality perspective. Did the mom have make great food? Sure. Absolutely.

Did everybody around her love it? Sure. Absolutely. Does that make her a qualified business owner? Does that make her a qualified marketer? Not at all. Not at all.

So having spent time and understanding the risk, you know, $300,000 worth of debt, and I'm not just talking about one person that I've experienced this with, I'm talking about many.

You know, if you can imagine, I've been doing this for decades.

You know, how many people have I come across that have leveraged them themselves, their finances, their family, for this great idea that they had only to watch it fall apart because there was aspects that they didn't know there was, there were things that they didn't calculate in the process.

So we have to be analyzing all the risks possible.

Right. You've got to list out every possible risk that is potentially associated with this decision, even ones that you're like, now, I don't know if this will be a risk. Let's take a look at it.

Whatever you can think of, the cost, the expenses, how long it's going to take to get materials, if you're going to create a product, how far in advance do you have to pay for that stuff? Right?

How long is it going to be from the time you start spending money on it to the time that you're going to start receiving, receiving money? What's the implementation time? Right.

Is this something you can do in a short period of time? Is it a month, two months, three months? Or is this going to take you twelve months, maybe two years, three years? How is this going to potentially disrupt your current processes?

Now, this is something, listen to me, business owners. This is something I want you to pay attention to. I cannot tell you the number of business owners that I have said.

You have to understand that if you're going to pull from your current money making product services, whatever it is, to go do something new, then there is a really good chance you're going to tank your moneymaker.

But over and over and over again, so many business owners go, ah, I'll be able to do it. I've got time. You know, my team's going to be fine.

They start a new process and then they realize they have to suck up 25% of their workforce and pour it into this new project, this new decision, because it's not going to make it.

They didn't calculate it correctly. They didn't realize how much time it was going to take. They didn't realize how much energy they were going to need to make this product work. So this is super important for you to understand.

If you go after implementing new products, new services, whatever, and you don't have the resources to do it all by itself, then there's a high probability they're going to start sucking out resources from your current moneymaker.

And then you're going to affect that. Not only you're going to affect that, but you're going to affect the way that your team operates.

The morale is probably going to drop, your culture is probably going to drop, you're going to get frustrated, your marriage is going to be affected, your, your children are going to be affected.

All of these things have a potential risk to them, right? Things you should be thinking through. So what is the reward? Well, if I have all the resources, then I can go after this product or service and it doesn't have to affect my current money making scheme, right?

The thing that I'm doing, the products and services that I'm currently doing, it doesn't have to affect that. Then you have to ask the question, how long can you do that?

How long can you use those resources to try and get to this reward? Right?

Analyzing Risks (00:18:07)

All of these things need to be considered. What about the impact of each individual risk? How much does the potential financial risk affect us?

How much does the time of the business owner or some sort of level of team working on this pull away from the current company of the current business that we're doing?

What about the amount of time before we get cash in? How does that affect us? Not only in the business, but how does that affect us personally? How much impact does each one of these potential risks have?

What about the time away from family? If you're going to be spending time away from your spouse, if you're going to be spending time away from your kids, what kind of impact is that going to have?

So list out every single risk, try and get to the best quality information on what that risk is, and then ask yourself, to what extent is that going to impact all these different areas of my life?

Now, there are great tools that you can use that you can start to understand some of these risks. A simple SWOT, Strengths, Weaknesses, Opportunities, Threats.

That's a great tool that you can use to run through these ideas. That's another great tool to start thinking through. What are, what are the strengths of this idea? What are the weaknesses? What opportunities do we have out there? What threats are out there?

Now, obviously, it's not comprehensive, but it is a fantastic start. I think another great tool would be a cost benefit analysis. Right?

How much money are we going to spend and what should we get back if we're going to go, you know, go ballistic and dump $200,000 into this whole project, this, you know, putting this product out there, and it creates $250,000.

So we have a $50,000 net increase from it.

Now, after having calculated all expenses, all, everything, it wasn't worth it. Was it worth 50 grand? Well, I don't know. Maybe that's just the first year. Maybe next year we make 250,000, 500,000, a million, whatever.

You know, doing a simple cost benefit analysis can help you to get to a place of understanding. What do the finances look like? You know, what's going out and what's hopefully, hopefully going to be coming back in.

Folks, if you've been listening to me for any length of time, then, you know, the number one issue when it comes to business, when it comes to family, when it comes to friendships, is having a lack of high quality communication to make sure that you are absolutely winning in every aspect of your life.

It all starts with having great communication.

The best way to get that communication is to understand your personality style and to understand the personality style of the folks that you're spending the most time with, whether it be at work, whether it be at home.

The best way to do that is to go to chrislocurto.com/store and get your personality profile and personality profiles for your team today. Get it for your family members today.

As you go through that profile, you will begin to see the greatest ways to, to communicate. Go to chrislocurto.com/store today.

Evaluating Rewards (00:21:37)

So as we go through all of these risks, we need to also evaluate the rewards. Like, what does it look like if it does increase efficiency?

You know, does it increase our, the way that we manage? I don't know. Our data, our customer insights, our customer service. Is it possible that there are rewards that could help us to do greater things?

You know, maybe a. An increase of net profit gives us more tools. That's something I'm always looking for, is if we can increase our net profit, how are we going to utilize it?

Now, for me, I tend to be somebody who utilizes it in. People tend to be, I'm not saying 100% of the time. I mean, there's obviously tools out there that we could spend money on that are going to make things better.

But I'm usually looking for, how can I bring more people on to accomplish more things? We are a company that is a service-focused company. We do have products, but we focus more on trading time for money.

So we aren't going after all of the, you know, the billions of dollars out there, like so many people are. Our top three focuses are one, worshiping God. We believe that he has made this possible, and he's going to be the one that blesses us.

And I, we're trying to follow his will. We're trying to partner with him on what he's doing, not the other way around. We're not doing something and asking him to come bless it.

We're trying to say, hey, what do you want us to do and how can we do it with the best of our abilities that you've given us? Number two is that we want to serve people.

We want to help people change their lives. We want to help people to get the best perspective they possibly can so they can make the best decisions they possibly can. After those two things, profit is our third motivating factor.

So we're-- almost all companies, profit is their number one motivating factor. For us, it's number three.

So we have to be super focused on evaluating risks, evaluating rewards, because we're always looking to see how is this going to benefit us, because our number one motivating factor isn't profit. Well, you're not.

Now, listen, I'm always going to run a profitable business. There's no point in running a non a pro business that doesn't have profit is going to fall apart.

You, you know, it's too much stress and all that kind of stuff. And truthfully, I don't believe God calls us to fail in that area. Now, this is different than running a nonprofit.

That's not what I'm talking about. Um, if God's called you to a service or a product, and God doesn't call you to fail. Right. So for me, it has to be profitable, but we also have to be very cautious since it's not our number one motivating factor.

We are not pushing everybody to go make as much money as we possibly can. We really have to weigh out all the risks and also look at what potential rewards could come that we weren't even thinking about.

Could something increase our efficiency that we weren't even thinking about, could something increase our customer insights we weren't even focused on that. Does it give us another potential reward?

Data management. You know, being able to mine a bunch of data in a CRM that gives us information that helps us to serve more people. What are some of those potential things that at the end of the day, you're like, man, that is a great reward.

I'm so glad that that happened as well. Right. Well, the goal is, can we figure those out beforehand? Can we get some of those rewards in our mind?

Not just the money, you know, not just the, you know, we've done something and we're actually able to move the ball forward more. Are there other potential rewards that could affect our business that we're not thinking about?

Spend some time, dig in, gain some insight. Now, what about the value of each benefit, say, over time? Right? Are we looking at a timeline of what this could be? So I'll give you an example.

For us, we do events. Events are very expensive. They're very expensive for us. They cost us a lot of money. But our hope is, is that that also turns into something over time.

Our goal is to help people, so we get to help people with the event, which is incredibly valuable, but we're also hoping that we help them so well that they become clients, future clients.

So what does it look like to say, you know, if we pick up more clients, that creates more revenue for next year, you know, into the future, maybe later on this year, or it could be seriously immediately. Right.

Estimate the value (00:26:11)

So a great thing to do is to estimate what's the value of, you know, each one of these benefits over a period of time. Right? Does it save us money if we, if we put something in place?

You know, maybe something is going to cost us money to create it, but it's going to save us money on something that we're spending a lot of money on.

You know, let's say by creating a new product, we were spending all this kind of money over here on creating this other product that's been making us money.

Yada, yada, yada. But now that we create this new thing, it changes our expenses. I don't know. I'm just, you've got to think through all of these different pieces.

What if it increases our sales in the long run because we have such a better customer engagement? So maybe this new product really hits home with our clients in a way that none of our other products have.

You know, we have clients that are going through our products, going through our services, but all of a sudden, we create something that really hits home. And now we have increased sales.

So not just what the clients currently doing with us, but now we also have increased the sales because we've hit something else that's super fantastic. Right?

When does that come in? How does that affect the timeline? How does that increase revenues, gross profit? What does that look like? Right.

Measuring rewards (00:27:41)

We've got to be estimating these things also. How are we going to achieve these rewards and then how are we going to measure them?

Right. So one, we have to put specific KPI's in place to measure the performance of how things are going, and we have to track these things.

Key Performance Indicators, as a KPI should share that part in case you don't know that. We need to be able to track the performance of the things that we're doing. We need to be able to track the benefits. Let's say we put in a new software program.

How's it working? Is it working? Are people loving it? Are they using it? What are they doing with it? How are they changing the way that they do their business?

Whatever it is, we also need to track that and then start asking ourselves the question, how well is it doing?

You know, one of the things that we do is we have a fantastic process where we analyze another company's sales processes, help them to see how they can increase and grow their sales by large numbers. Right.

We have to be able to take this process that we're helping them with and track it and show them the performance over time. Here's how your growth is going to happen. If you just do this, you're going to see this. If you do this, you'll see this here. Right.

You've got to do the same thing for your business to be able to go. If we're putting this in place, how well is it performing?

How well is it doing? So just a practical application of something that we tend to do. We tend to take a look at our year and we ask ourselves, what are our resources and what is the capacity of all of our resources?

So, for example, it is not uncommon for us to take a look at the year because my time gets kind of divvied out between events and doing the show and coaching and doing the big events, doing StratPlans, doing Next-Level Lives, doing the quarterly retreats.

My time gets divvied out for all of these things. Right? So we need to figure out what is Chris's capacity? Does he have capacity to do something else? If he does have capacity, let's go through all of the resources that it's going to require.

What about the team? Does the team have time to help? Do we have the money to back this thing up? Do we have the clientele? Are people going to want this thing?

For example, a few years ago, we had all of these different events that we wanted to launch. We sat down as a team, just brainstorming great events that we wanted to put in place. And as we came up with all these different events, I said, great.

Now here's what I need you guys to do. I want you to go back and tax all of our resources, and I want you to tell me, how many of these events can we do in the upcoming year?

How many can we do? How much team resources are going to use? How much money is it going to use? How much money should we make? All these different pieces.

I put all these pieces out there so that my team would calculate the risk. And they were super excited. I remember one guy's like, we should be able to put three of these events out there. You know, we might be able to drop one a quarter.

And I'm just like, okay, well, go research it and come back. When they came back, they were like, we can do one that I was like, yep, that's all we can do because we're already running and gunning as is.

So we talked through it, we talked about the specific event that we wanted to launch, and we talked about how much it was going to tax the entire team, right?

Money wasn't the issue. We had plenty of money to take the risk, right? If it failed miserably, the amount that it cost, we were going to be okay with that, right?

And we weren't going to be okay if it failed, but it wouldn't hurt us, is what I'm trying to say. The big issue, when we looked at everything software, we were going to use the tech aspect of doing this event, utilizing our own event space.

That was great. We owned it. We didn't have to go rent another space. The big thing was, it was going to tax the team because we were creating a brand spanking new event, so everything had to be recreated.

That was the piece that when the team sat down, they said, we can't do more than one thing. If we do this one event, we think it's going to have the greatest impact on people, but it's also going to suck up all the capacity that we have as a team.

So we made the decision we went through, we did the event, we put everything together. The team created this thing. I obviously created lessons. And all these things to make this event fantastic.

We put the event out there. Success. We made money. That was great. People got their lives changed, their businesses changed. That was fantastic. And the team was not stressed out. The team wasn't, you know, hating the fact that we did this.

We calculated both the risk and the reward. It was fantastic. It worked out. The clients were happy, but the team grew. Here's one of those side benefits that I'm talking about, right?

So not only did we make money off of the event. That's great. We didn't lose money. That's fantastic. But our team grew. Our team morale grew. Their experience grew, their collaboration grew.

So not only did we have the benefit of, you know, worshiping God with the gifts and talents that he gave us, helping people to change their business and their lives, made money on it, but our team also grew in their gifts, their talents, their efficiencies, all of that.

So, folks, this is why I'm telling you that you need to be focused on calculating risk and reward. At the bare minimum, you need to be calculating the risk, but you should be calculating these rewards as well.

Additional Resources (00:33:51)

So do me a favor. I want you to go back and check out an episode we did on risk taking. It's episode 540. It's called The Pros & Cons: Becoming a Risk Taker.

So, are you currently a risk taker? If you've ever invested in something or made bold decisions or faced uncertainty head on, then you absolutely are. But how did you assess risks and what might be holding you back from taking the necessary actions? Right.

All of this is covered in episode 540 | The Pros & Cons: Becoming a Risk Taker

Conclusion (00:34:26)

Folks. Calculating risks and rewards is key to making smart business decisions.

By spotting potential risks, by understanding their impact, by balancing them against the possible rewards, then you can make the choices that truly benefit your business, your team, your finances, your culture, your morale, all of that, right?

So start using these strategies today. It's not that difficult. It does take up some time. You do have to have an open mind to getting as much information and great perspective as you possibly can.

But use these strategies today to improve your decision making and confidently move your business forward. Well, hopefully this has helped you today.

As always, we want you to take this information, change your leadership, change your business, change your life, and join us on the next episode.