Every owner must accept risk to be in business. Some accept it blindly never considering, or preparing themselves for the possibility of, failure. The one thing owners of successful businesses all have in common is that they identify and manage their risks. Peter Drucker, the widely known and influential thinker on management said two things that are relevant here:
“What gets measured gets managed”
“There is nothing so useless as doing efficiently that which should not be done at all.”
These quotes suggest that you must measure and manage the right things if you want to achieve the outcome you desire and avoid outcomes you don’t.
For example, most of us have savings that we hold in reserve for unexpected needs or to cover a temporary loss of income. We measure those accounts in dollars, because that’s what we put in the bank. However, the utility of these funds is not dollars but how many months’ rent or mortgage could be paid before the funds are exhausted? Yes, we save dollars, but we don’t know how financially strong we are until the utility of those dollars is assessed in a metric that determines our success.
To apply this concept to a business, one might ask what minimum levels of sales yields enough free cash flow to support the firm’s essential needs. If the likelihood of falling below that threshold is uncomfortably high, perhaps it is time to restructure the firm or to pursue a larger credit facility that could be tapped into whenever the business was slow. Could the firm reduce the risk by cutting overhead or is more marketing likely to grow sales enough to generate the needed cushion? Maybe a combination of both is the answer? Once risk is assessed, management must proactively reduce the firm’s risk to acceptable thresholds so it will be ready to endure adversity.
Successful business owners build resilient businesses. The key to keeping your business in good financial shape is to identify where your firm is vulnerable and how that risk can be managed, both proactively to avoid hardship and reactively in response to it. Do you have the resources to weather any storm? If not, you’ve got too much risk and should begin addressing this problem immediately. And remember that managing risk is a process. Your business, its strengths and weakness, your competition and the economy will constantly change. Successful managers keep abreast of these developments and continuously adjust their business plan as new threats and opportunities materialize. Well thought out plans make a firm resilient by allowing management to respond to challenges with the same vigor they do opportunities. Resilient firms don’t just survive, they thrive through market downturns.
Originally Posted on Forbes.