As most of you know all too well, entrepreneurship is not for the faint of heart. It’s hard work. It’s stressful. The hours are long and there’s very little certainty from one day to the next. But, if you think successful business owners love to take risks, think again.
Too Many Risks = Bankruptcy
We all know the miserable statistics for businesses that don’t survive their first five years. The main reason for this high failure rate is that business owners don’t realize how much cash they really need to get their businesses off the ground. An even bigger issue is that new owners often think they’re supposed to take risks. Isn’t that what entrepreneurs do? No! That kind of thinking can be a death knell to any business.
It’s all about Measured Risks
I’ve been involved in many businesses over the years as an investor, advisor and entrepreneur. Sure, I’ve taken risks. But each and every risk I’ve taken has been a measured one. I never throw caution to the wind and bet the farm. Take a look at businesses that appear to be taking big risks. In reality, you’ll find that most of the seemingly big risks are really carefully measured risks based on the size of the business and the risk it is taking.
Even Apple, with infinite resources and billions of spare cash, rarely takes big risks. Almost all Apple’s innovations are incremental. It’s the same for any successful business. The risks might look large and bold from an outsider’s perspective, but for the business owner they’re just incremental—situations they can get out of quickly and easily if need be.
Fast Growth isn’t It
This is where many new businesses fail. They think they should focus on growth first and profits second. Sure, you can find examples of businesses for which this strategy has worked. But I promise you that far more businesses have crashed and burned–not prospered–by following the growth-first approach.
Businesses with longevity are the ones that know that without profits, you can’t have positive cash flow. They also know a sustainable business always looks at profits before growth. If you’ve been in business for more than ten years, congrats! You know you need a healthy cash cushion at all times to get through the bumps in the road.
If you spend every last dollar on growth, eventually, there will be a time when the market moves against you. Those times can cause your businesses to take a severe hit, even fail. Businesses need rainy-day funds, just like people do.
Always Consider the Downside
If you only talk about the potential upside of an idea, you’re doing yourself, your employees and your stakeholders a disservice. Successful business owners know that it’s very rare for a business or product to come to fruition exactly as envisioned in the original business plan. Pivots are part of the game and there always has to be a worst-case scenario built in to your game plan. Even if you’re not talking about the downside, your best customers, clients and financial backers probably are. Build up your cash!
Delegate (with Oversight)
Entrepreneurs who build larger firms have to learn how to delegate. They know they can do everything on their own. If they’re successful, they’ve learned that it’s not just delegation that’s important, but delegation with oversight. Always make sure there is a review process in place so you can decide whether to move forward on an idea, to pivot or to just plain stop.
“Plan for the Worst and Hope for the Best”
This has been my mantra for years. As one owner told me recently: “Planning for the worst and hoping for the best has saved me from bankruptcy several times. My first venture worked out well, but as I learned the hard way, I was lucky the first time, not good. My second and third big bets did not work out. That’s why scenario planning quickly became a crucial part of my planning process as I got older and smarter.”
I couldn’t agree more.
Conclusion
Make sure you have at least one financial advisor you can trust to be a true “thinking partner” and sounding board, not just a number cruncher/document preparer. If you or someone close to you is at a critical juncture in their entrepreneurial journey, I’d love to meet and see if we can get the enterprise to the next level of success.
– Dave
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