Partner Article

Nothing ventured, nothing gained

Entrepreneurs are often praised for their willingness to take risks. But while building successful businesses does sometimes require a leap of faith, how do you tell the difference between a calculated risk and one that is reckless?

This is an important question for founders of fast growth businesses, and in order for them to be able to answer it honestly, they must understand the ongoing risks for their business.

For example, have you looked in detail at the financial risks to which your business is exposed, particularly around cashflow and working capital? Ostensibly successful companies can go bust even when they’re adding more customers simply because they don’t have enough cash in the bank to pay suppliers.

Scalability is another key risk area. When growing rapidly businesses often invest in infrastructure that is cheap and quick to implement but that may hold the business back once they reach a certain size. It is important to review existing platforms – whether its IT systems or distribution networks – and ensure they are future-proofed for growth.

Also think about your own bandwidth. Founders are pulled in many different directions as their businesses grow. Failing to share the load puts that growth at risk; you may no longer be able to execute your increasing responsibilities effectively, and you will certainly have little time to step back and take a strategic rather than operational view to properly assess new opportunities.

If your business is to survive and prosper, it’s crucial to manage these risks. In the early stages of growth, that may not require formal structures, but you must take the time necessary to think about potential problems.

Seek advice where appropriate. For example, if you don’t have accounting expertise taking professional advice on your finances can help identify potential pitfalls before they become a larger issue. More broadly, talk to customers, suppliers, investors and even competitors about their insights on potential opportunities, using this to inform you on how to move the business forward prudently – and what might cause you problems on the road ahead.

In time, you should move towards formalising risk management structures. If your business has a board, it should regularly review the risks and opportunities facing the company, with specific people responsible for managing this process. The right non-executive chairman can offer valuable support here.

Many companies maintain a risk register. This is a high-level document that sets out all the dangers the business is aware of, prioritised according to the scale of the threat and the likelihood of it materialising. This can also be a useful prism through which to evaluate new opportunities – both in terms of the risks they pose individually and how the risk/reward profiles of different opportunities compare. There will always be more opportunities to pursue growth than the company can explore at one time, so this can be a valuable mechanism for making smart choices.

It’s important to spend some time future gazing. In practice, the most significant damage happens when a business does not anticipate a risk and is therefore unprepared. While you won’t be able to second-guess every potential problem, thinking ahead will enable you to anticipate many risks before they occur. Be as outward-facing as possible in this regard; openness with others in your industry about risks and lessons learned will create a valuable dialogue for the future.

Get this whole process right and there should be fewer unpleasant surprises. You can’t grow without accepting a certain degree of risk and some risks are harder to spot than others – few businesses saw the financial crisis coming, for example – but prudent entrepreneurs manage their growth with a broad range of risks in mind. That should leave you well-placed to ride out the storms you haven’t foreseen.

This was posted in Bdaily's Members' News section by Steve Cordiner .