With risk and debt, business owners have to walk a fine line
Entrepreneurs can make as many backup plans they want - but will they work?
The risk leverage ability in business is a factor to reckon with. Entrepreneurs need to vet their ability to take on risk leverage thoroughly - not only in the context of the business’s debt but as a measure of the company’s overall risk resilience.
Be it the enterprise’s entrepreneur, shareholders or management, everyone must know how to manage risk factors and the unknowns that come with them. What does this entail? Conventional wisdom suggests not to do anything that stretches matters beyond available means. I see people often making fatal mistakes in evaluating risks and jumping the signal. I suggest formulating a prudent risk strategy where you stretch to the extent that you don’t break, and only taking risks that one can consume.
Known risks must be specifically identified and factored into planning and execution of the strategy. For instance, if initial capital is not sufficient to support ongoing working capital needs, then map it against available cash resources, including bank finance or subordinate debt, with a definitive eye on contingencies such as a private loan or asset sale that you can indeed manage.
No easy money out there
How often do you see business owners make assumptions, thinking family, friends, and angel investors would come to rescue if things go wrong, to the extent that they even make it part of their plan B? It might work. But to what extent does help come your way, especially if your exposures are monumental?
Be realistic when mapping for contingencies. Rise above emotions and sentiments and be strictly realistic. Map the available contingencies with plans A, B and C. Plan A and B may fail, so always work multiple scenarios considering the moving parts in the business, to overcome the fear of failure in business, emotions and egos that come into play. Unfortunately, this is counter-productive.
A time to regroup
At times it could be faltering sales targets or receivables or the spike in production or cost of sales that can upset the projected plans. Here is where there is a need to plan using all permutations. At times, it is essential to retreat and take stock of the situation by realigning your available - and constrained - resources.
If sales targets are plummeting, how to reduce overheads whilst planning new approaches and tap funds to support cash deficits, if any? My advice is not delve into business until you ring-fence your reversibility factor. Many call it a business temperament that people must possess if wanting to enter. My contention is about the quantum of maximum risk one can take, which is much beyond financial risk.
Planning for all the unknowns
Look at extremes of the unknown - not just sales, cashflows, cost overruns, bank u-turns, and key people unavailability, which can extend from critical illnesses, family exigency, and team exits to events such as Covid, labour exits, etc. If the unknown strikes, how much can you salvage and manage the downturns?
It could be that you can manage a possible stretch by selling your immovables or borrowing. The worst is where you may have to live with the least resources to manage the downturn. More than ever, the key resource is your own mental and physical preparedness.
Are you prepared to handle the stress and its related pressures?