10 Unusual Ways to Reduce Business Risk
There is a common misconception that being an entrepreneur is all about taking huge risks and doing something so original that all you can do is work hard and hope for the best with no way of predicting if you’re going to be successful.
This myth is encouraged by a business media that needs dramatic success stories and adventurous characters to put on front pages and TV screens. Those impressive success stories are rare, that’s why they are newsworthy, and equally rare are the few entrepreneurs who base a career on taking huge indefinable risks one after the next.
On the other hand, there is an untold story that is far more common. An enterprising individual starts and builds a business and then limits risk exposure by doing everything possible to not go out of business and only when there is a cash surplus is more risk taken on. And even then the risk is isolated so the survival of the business is not threatened.
There are many ways to reduce business risk to significantly improve the likelihood of success.
Your first priority must be to develop a portfolio of products, clients and key employees. If your business revenues depend on one product you are asking for trouble. At any moment a competitor could introduce a superior product and grab your market share. The complacency that comes with success needs to be offset by realism. For stability and long term success it is imperative you have a product portfolio that can survive the loss in revenue of a leading product.
You also need a portfolio approach when it comes to clients. Anytime your entire business is dominated by a small number of major clients you are in a weak position. Any astute client will know he has bargaining power and the ability to demand better terms and lower prices.You can easily find yourself in a position where you are unable to say no to unreasonable demands. Use your ability to serve big clients as proof you can deliver when you sell to potential clients. And don’t delay in building a more balanced portfolio of clients.
Finally, if your operation depends on a few talented employees you are in trouble. It’s better to have well designed business systems that good employees can run efficiently than to need exceptional employees who can run your idiosyncratic organization. Whenever you are dependent on a few people you are again in a weak bargaining position anytime you face demands for better conditions or higher pay. Plus, it’s difficult and expensive to replace key employees when they leave.
You must design better business systems to reduce your reliance on a few key people. That way, your operation can continue to function regardless of who comes and goes.
2. Customer Value
Many business owners don’t know the value of a client over 5 years or even over 10 years. You need to know this before you can allocate a marketing budget. Advertising is an investment in client acquisition and not an expense but you can’t justify the ad spend until you know the value of a client.
When you have the metrics and know the value of different types of clients you can expand lead generation activities to acquire an ongoing stream of new clients. You can also set up and manage multiple lead generation activities when you can calculate the ROI of this work. This approach then allows you to scale with precision, it becomes a question of mathematics. Spend more, acquire more clients and grow at a steady pace.
This is a controlled way to fund and manage growth but it can only happen when you know the lifetime value of a client and manage your client acquisition costs.
3. Working Capital
Working capital is the life blood of any enterprise and it cannot be ignored. You must stay up to date on a weekly and monthly basis to plan ahead. Although over trading is attractive when you are focused on growth it’s the one risk that kills a lot of otherwise well run companies. Allow for delays in receiving client payments and anticipate going over budget on costs or you can easily find your overly optimistic projections turn out to be a fantasy.
Entrepreneurs need to counter their natural optimism with a degree of pessimism when it comes to cash flow or else any major setback could lead to business failure.
The failure to monitor working capital and deal with any problems can be a greater risk factor than a failure to expand sales revenue. It deserves your ongoing attention and a willingness to face the music instead of selling harder to get out of a bad situation.
Business owners are less risk averse than the general population and are more likely to find risk taking exciting and emotionally compelling. However it’s important to remember that business is not a form of gambling, it’s a highly controlled way to offer value to the marketplace and make a profit. The excitement of risk can be met in many ways outside the office but it clouds judgement and leads to poor decision making at work.
If you enjoy risk and find it hard to resist, make a point of spending leisure time in ways that meet that need. Maybe you need some high adrenaline sports to keep you amused or maybe you need to relieve stress by working out in a more extreme way. Either way recognize that risk excitement has no place in the office. In fact, your focus needs to be on reducing risk exposure.
Excitement and passion are great drivers to build a business but when it comes to rational decision making you need to be informed, objective and in control not hyperactive on adrenaline.
5. Vanity Spending
As we become more successful it’s understandable that we want to enjoy the trappings of success but often this is simply a trap. We can easily take on more and more overheads because we can afford it but in turn we leave ourselves more vulnerable to any downturns. It’s good to leave a margin of error as your business expands. There is no reason to operate on tight margins when you can maintain tight cost control and build a cash reserve to weather unpredictable storms.
Vanity may encourage you to move to fancier offices, lease better cars and buy higher specification equipment than you need but remember the point of the business is to invest to make a positive ROI and still have a cash reserve. If you can upgrade your office environment and maintain some financial flexibility then it can make business sense but don’t over spend too soon or you’ll have less ability to respond to unexpected shocks.
6. Reinvention Fund
Over a long enough timescale you’ll experience major upheavals in your office, in your market and with your client base. It’s foolish to think otherwise and reckless to not plan for change. For this reason you need to know that reinvention will be required time and time again in order to grow and sustain a profitable business.
We often plan for long term capital investment, upgrades and maintenance but somehow we often don’t take the same view when it comes to personal performance. To reduce business risk it’s important to stay up to date with market and industry changes and equally important to update your skills. Are you falling behind and feeling complacent about it? Do you sometimes feel you don’t understand the market as well as you used to? Do you think new technology is something best left to younger generations?
Any reluctance to stay up to date and well informed is a background risk that could you leave you out of touch with the dynamics of a fast changing business world. The only antidote is to budget time and money for business skills development. Reinvention is not a luxury, it’s a survival strategy.
7. Pattern Detection
Staying relevant and ready to lead as an informed and prepared entrepreneur requires a curiosity about the trends that are changing the needs and demands of your clients. Expect changes in related but different industries to influence what your clients expect of you. And expect disruptive technologies and new approaches to present both opportunities and threats for you to handle.
The best way to stay up to date is to be alert to trends in your industry, the local economy and even the international economy. You can only anticipate and prepare for what is happening next if you remain up to date with the drivers of change. Do this and you can respond early to threats and be better prepared to seize new opportunities.
In fast moving times we can’t afford to expect a winning formula to keep on working. We need to be ready and aware of what is coming next. A lack of preparedness is an unnecessary risk we have no reason to take.
The fastest way to improve business results and reduce risk at the same time is to model success. Sales systems, cost management systems, operational processes and distribution systems can all be improved without starting from scratch and trying to reinvent the wheel.
There is no bonus for making life more difficult that it needs to be, you can save time and money by copying approaches that already work. Often you can borrow new ideas from other industries to improve your business processes. The key is to learn from people who have a track record for producing results. Read their books, attend their seminars or hire their consultants. It’s a fast way to achieve better results.
Whenever you hear about a fast growing business regardless of the industry or market they are in, make a point of studying what they are doing differently so you can find models you can adapt for your own business.
9. Trusted Advisors
No matter how successful you are, you will still have times when you feel stuck or don’t know how to solve a serious problem. At times like these you need trusted advisors who have already been there and done that. This is not a time for self proclaimed experts but the right time to seek the advice of people who have already successfully dealt with the problems you are now facing.
As you build a network of peers and industry colleagues make a point of getting to know the elders in the business community. Sometimes they have retired but often they are still active and open to advising the next generation. They have a lifetime of wisdom and insight that often goes overlooked by others and this is your opportunity to cultivate friendships and mutually beneficial business relationships where both parties learn and grow by interacting with each other.
Every single problem you face in your business has already stumped some people and helped to put them out of business or it’s been solved time and time again by the elders in your business community. Ignore their insights and willingness to help at your peril.
Years of hard work and management experience produces a tremendous amount of valuable knowledge about what you and your business can handle. This often unconscious intelligence is always at work, analysing what’s working, looking for potential problems and communicating with you through subtle feelings and nagging doubts.
Otherwise known as your intuition, this intelligence will let you know when there is something not quite right in your business. However if you stay busy and remain optimistic despite warning signs of impending failure it’s very easy to ignore the intuitive feelings that tell you to stop and address certain issues. That’s why it’s so important to find some quiet time to relax each day, some time to think and pay attention to any nagging doubts and observations you would prefer to ignore.
Ignore your intuition and you are ignoring the accumulated intelligence and wisdom of your unconscious self. It somehow knows what you need to pay attention to but it’s still always your choice whether you listen or not. Interestingly, phenomenally successful people often credit their intuition as one of the sources of their success.
Cultivate your intuition, pay attention to your gut feelings and have the courage to face the early warning system that can help you to avert potential failure while you still have time to course correct. Many who have failed in business wish in retrospect they had listened to the guiding voice of their intuition before it was too late. There is no need for you to make the same mistake.
Photo by Rainer