29 Oct 2014, 11:21 — 5 min read
What can happen in a business will – and likely happen when you least expect it to be.
With growth comes predictable and somewhat, unpredictable risks. Usually, these perils apply to any growth business, albeit in varying degrees. Younger companies with faster growth rates are more affected than counterparts who are mature,and have slower growth rates.
If you are a small business owner, your survival significantly depends on identifying and managing these risks – all in a deft manner.
“Decision making abilities fade as cash flow increases”, Warren Buffet said in one of his most famous quotes.
For instance, you only had INR10,000 in your pocket as your monthly expenditure when you started your business. Most likely, you made all the right choices and decisions with it. On the other hand, if you had INR 2,00,000 for the month, your decision regarding a purchase worth INR 10,000 would be far less critical (since you have an additional INR 1,90,000 to spend). Therefore, you may not treat the decision of spending the lesser amount with the same respect as your last INR 10, 000.
Maintaining cash-flow is considered as the biggest financial risk, and businesses must quantify where the money is coming, how to pay its employees, manage operations, and invest in market penetration and growth.
Managing the risk
As Parkinson’s Law states, expenses rise to meet income. This is the reason after couple of months after increase in revenue, you feel that you still have higher bills to pay. So, ultimately, your success in business is determined by the degree in which you generate, and hang on to cash.
It is prudentto identify and plan for your company’s cash flow needs for the next 2+ years. Calculate your monthly expenditures and how long will it last until the last penny dries up. Likewise, evaluate your total accounts payable to accounts outstanding as a slowdown can lead to a cash-crunch. Creating a clear and realistic contingency and exit strategy would help you navigate through even if you (think!) lose your biggest client. Moreover, a wise option is to keep aside at least four to six months of operating reserves aside.
As we sum this up by another Warren quote “The first rule is not to lose. The second rule is not to forget the first rule.”
Risk No. 2: Under-developed operational infrastructure and procedures
As the second most common risk factor, most companies are so focused on their products and services abilities that they spend little effort on building operational infrastructure to sustain their growth over time. ‘Systems’ that are often regarded as the second vertebrae of the infrastructural/operational backbone include:
Many decision makers mistakenly equate ‘systems’ with ‘overheads’. However, in reality is developed operational infrastructure is required tolaunch an effective go-to market strategy,engage in active customer service, generate new revenue channels and sustain competitiveness.
Managing the Risk
Start by transforming your manual work processes before you dabble with your technical systems. “We need a new CRM” is an easy retreat, but any system is only as valuable as the information that goes into it - that means you may just be automating your company’s own inefficiencies. Spend time to create an appropriate level of operational infrastructure, as your firm’s success depends as much as you working on your business as working in it.
Risk No. 3: Not acknowledging key employee efforts
This happens in every organisation and probably is the toughest to address. The growth curve of a business often outshoots the skills of certain key people who helped build it through its formative period. This forces tough decisions to be made in order to sustain the company’s growth.
Managing the Risk
Selecting and promoting the right people is the biggest factor that sustains growth. However, being loyal to, and acknowledging all past contributions creates a harmony which is conducive to long-term relationships of the company. Appropriately set new performance expectations based on current business needs. Include a healthy Selection, Rewards and Developmental plan that will reinforce these new expectations, while motivating key employees to un-learn and acquire new business skills.
Posted byGlobalLinker Staff
We are a team of experienced industry professionals committed to sharing our knowledge and skills with small & medium enterprises.
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