You run a successful business. On the path to success, you have taken several risks. Some small, some big. Some risks have paid off handsomely. Some have either not paid off or have resulted in pain.
Businesses grow more risk-averse as they mature or become stable. Adults wouldn’t think of getting onto a seesaw; a child happily does. In the early stages of business, it’s necessary to take risks to grow or even survive. For a stable or mature business, there’s much more to lose. There are huge fixed costs to pay, revenues to defend and a significant reputation to keep safe. The chances of a mature business taking existential risks are low. Such as making significant investments into a new business or expanding hard and soft capacities prior to actual demand.
So a mature or stable business is more risk-averse. And some of the reasons for lower risk-taking have merit. But how do you know when you are being too conservative?
Sign #1: Your sales are entirely through word-of-mouth
A customer recommending your product or service is the greatest compliment. Yet, if a good proportion of your sales are through word-of-mouth marketing, you may be far from reaching your potential. If word-of-mouth has helped you build a successful business, your business could take a quantum leap with the right marketing and sales strategy. Don’t know where to start? This article has some pointers.
Sign #2: You repay loans much in advance
It’s an obligation (which some businessmen sadly don’t understand!) to repay your loans. So, it’s great if you are consistently repaying them before maturity. Yet, if for every loan you end up repaying within 50-70% of the maturity period, it may be a sign of conservatism. You might be underestimating the ability of your business to generate future cashflows to service debt. And starving the business of much-required capital for expansion. This obviously does not apply if your business is generating enough cash to fund expansion. Also, being prudent in your debt repaying capacity is good. It’s only the extent of prudence you should be aware of.
Sign #3: You are always close to full capacity
It’s good to be operating at full capacity. Who doesn’t like utilizing their assets to their full potential? Yet, if you are constantly at full capacity, it’s likely you aren’t meeting all your demand. Capacity addition should happen to meet expected demand. It follows that there will be times when capacity utilization is average and then moves up as demand picks up.
Sign #4: Your cashflow situation is typically rosy
Cash is king. And all businesses need cash to survive. Yet, holding too much cash can also be a bad thing. It could be an indicator that not enough cash is being ploughed back into the business for future growth. And scarcity can be good sometimes. It encourages businesses to be frugal in their spending and think of new ideas for cash generation. That said, a cash cushion is advisable. The amount of the cushion should depend on the cyclicality of the business, potential acquisitions and R&D spends.
Closing thoughts
Some big names have gone under by not moving fast enough and responding to market needs. Not acting is the biggest risk. And being conservative sometimes goes hand-in-hand with inertia. That said, there’s nothing wrong in being happy with where your business is. If being conservative keeps you happy, that’s the way it should be. Nothing beats a happy and contented existence.
The article title said 5 signs and I’ve given you only 4! I’ve left the 5th sign for your inputs. Please share your thoughts in the comments section. The best suggestion gets added to the article! Or write to / call me at sunildias@iv-advisors.com or +91-9322 737 127.
5. If you try to do everything yourself and do not appoint more capable persons than you, It is always better to appoint experienced persons for a job, who you may feel to be costly at first, than trying to do spend most of the time doing mudane jobs and not alloting time for more important jobs, such as future of business growth. Believe me, you will reap the benefit almost immediately if someone shares your worries and take the load off you. Identify the department which you can off load and appoint a experienced, capable and responsible person for that job.
Excellent addition, Ashok! For a business to expand, the founder needs to focus on strategy, not daily operations. If a business is unwilling to pay competitively for great managers, the founder will very likely be sucked into daily operations.
Sign #5: You spend significant time on daily operations
Thanks for your inputs, Ashok!
5. I completely agree with Mr. Rao, in fact that was going to be my point no 5. Nonetheless another very important area is that we need to keep innovating constantly. Whether its the service that we are providing or the product that we are manufacturing. The way we treat our staff or employees, the way we do business, basically all aspects of business needs to be examined at regular intervals and a strategy chalked out, and executed . Jose Braganza
Thanks for the great addition, Jose! If you look back a year or two and find your business hasn’t changed significantly, that’s a definite sign of conservatism and inertia. Constantly looking for a better way to do things is essential.
Sign #6: The way you do business has not changed for some time
Glad that Ashok Rao beat you to your first choice of No. 5. We wouldn’t have got this valuable addition otherwise! Thanks Jose!