5 Signs You Are Being Too Conservative
You run a successful business. On the path to success, you have taken several risks. Some small, some big. Some risks have paid off handsomely. Some have either not paid off or have resulted in pain.
Businesses grow more risk-averse as they mature or become stable. Adults wouldn’t think of getting onto a seesaw; a child happily does. In the early stages of business, it’s necessary to take risks to grow or even survive. For a stable or mature business, there’s much more to lose. There are huge fixed costs to pay, revenues to defend and a significant reputation to keep safe. The chances of a mature business taking existential risks are low. Such as making significant investments into a new business or expanding hard and soft capacities prior to actual demand.
So a mature or stable business is more risk-averse. And some of the reasons for lower risk-taking have merit. But how do you know when you are being too conservative?
Sign #1: Your sales are entirely through word-of-mouth
A customer recommending your product or service is the greatest compliment. Yet, if a good proportion of your sales are through word-of-mouth marketing, you may be far from reaching your potential. If word-of-mouth has helped you build a successful business, your business could take a quantum leap with the right marketing and sales strategy. Don’t know where to start? This article has some pointers.
Sign #2: You repay loans much in advance
It’s an obligation (which some businessmen sadly don’t understand!) to repay your loans. So, it’s great if you are consistently repaying them before maturity. Yet, if for every loan you end up repaying within 50–70% of the maturity period, it may be a sign of conservatism. You might be underestimating the ability of your business to generate future cashflows to service debt. And starving the business of much-required capital for expansion. This obviously does not apply if your business is generating enough cash to fund expansion. Also, being prudent in your debt repaying capacity is good. It’s only the extent of prudence you should be aware of.
Sign #3: You are always close to full capacity
It’s good to be operating at full capacity. Who doesn’t like utilizing their assets to their full potential? Yet, if you are constantly at full capacity, it’s likely you aren’t meeting all your demand. Capacity addition should happen to meet expected demand. It follows that there will be times when capacity utilization is average and then moves up as demand picks up.
Sign #4: Your cashflow situation is typically rosy
Cash is king. And all businesses need cash to survive. Yet, holding too much cash can also be a bad thing. It could be an indicator that not enough cash is being ploughed back into the business for future growth. And scarcity can be good sometimes. It encourages businesses to be frugal in their spending and think of new ideas for cash generation. That said, a cash cushion is advisable. The amount of the cushion should depend on the cyclicality of the business, potential acquisitions and R&D spends.
Sign #5: You spend significant time on daily operations (contribution from Ashok Rao of Rajeev & Company)
For a business to expand, the founder needs to focus on strategy, not daily operations. If a business is unwilling to pay competitively for great managers, the founder will very likely spend significant time on daily operations.
Closing thoughts
Some big names have gone under by not moving fast enough and responding to market needs. Not acting is the biggest risk. And being conservative sometimes goes hand-in-hand with inertia. That said, there’s nothing wrong in being happy with where your business is. If being conservative keeps you happy, that’s the way it should be. Nothing beats a happy and contented existence.
The article title said 5 signs and I’ve given you only 4! I’ve left the 5th sign for your inputs. Please share your thoughts in the comments section. The nice ones get added to the article! Or write to at sunildias@iv-advisors.com. This article originally appeared on http://iv-advisors.com/5-signs-conservative/
Sunil leads Iv Advisors (http://iv-advisors.com). He helps 1st and 2nd generation family businesses deal with stagnating or unpredictable growth.
