Staying On Point - Risk

 

At Twenty Eighty we love to help. It's our M.O. to analyze, assess, educate, and bring our clients from a point of "you don't know what you don't know" to a place of harmony within their small business (financial, accounting and otherwise). We believe that business planning and strategy execution is key, so "Staying On Point" is a blog series aimed at highlighting issues that small business owners face, and providing learning points in that regard (and hopefully spurring some discussion from our community as a whole as part of the process!).

To that end...

 

There are a lot of four letter words in a small business owner's repertoire, many that young ears should never hear. There is one however, that is both highly important and often neglected: risk.

Survival Rates of Small Businesses

Small business is fraught with risk. In Canada, about 85% of new businesses survive for one year, 70% survive for two years and 51% survive for five years. This is very much in line with US statistics, where if you move further out the curve, to 10 years, only 35% of small businesses survive.

 

Average US Small Business Survival Rates

This graph would be a lot of fun if it was an elevation profile and you were a cyclist. It's not however, and it shows the importance of being prepared as a small business owner.
 

Think about those stat lines for a second. Then imagine if you went to your partner before you started your business asking for approval. "Honey, I would like to start my own business. I've got this amazing widget that everyone will love. I'll probably need you to start saving up a ton of money though, and likely make a number of other significant sacrifices... as I'm far more likely to fail than succeed. In fact, the longer I'm in business, the more likely it is that I will fail. Sound good?"

The blank stare looking back at you would be a sight to say the least, and you and your couch would reach a new height of intimacy for the next few months.

Why Survival Rates Look The Way They Do

At this point, it would be good to point out that there are two types of entrepreneurs: risk takers and those who are risk averse. The general media would lead you to believe that the risk takers are those like Sir Richard Branson, while the rest of us meager mortals are risk averse simpletons. This is categorically untrue, and in fact, backwards. The most successful small business owners are those who tend to be risk averse, while the least successful entrepreneurs tend to be risk takers.

Looking at our ugly graph again, one can begin to see how inexperience creates the precipitous drop in the curve... as new small businesses and entrepreneurs skew the data. These companies take a number of undue risks. They take on too much debt, they extend credit to others without consideration for cash impacts, they miscalculate required startup capital... generally speaking, they ignore the importance of financial data and business planning as a whole.

These oversights, and others, literally kill the small business owner's dreams, regardless of how good their idea or concept is. In the first year, the highly unprepared fail. The year after, the slightly less prepared fail, and so on, and so forth. Until only those who are experienced or now very battle tested are left, dramatically increasing their odds of success, and flattening the overall survival rate curve. This process is absolutely Darwinian.

Scout's Motto: Be Prepared

So let's look at those who are risk averse. What do they do that is so special? How are they successful without taking risk?

First off, appreciate that risk averse investors do not avoid risk, they take calculated risks. They know that failure is a definite potential, but they have also quantified their potential reward, and have compared the two to ensure that it makes sense (this is called a risk adjusted rate of return as a side). These savvy entrepreneurs have also mapped out a business strategy that leads them into the future, quantifying sales targets, cost targets and general profitability.

By integrating a formal business plan with financial tracking, experienced entrepreneurs have stacked the deck in their favor (going to a knife fight with a gun so to speak). Their business will flourish or fail on the concept itself, not because of unforeseen financial issues. In a way, these business people aren't doing anything special at all, quite the opposite as they develop a structured plan, and follow it out. These plans obviously have contingencies and adjustments, but they are a far cry from the gun slinging entrepreneur we often think of.

Conclusion

Risk... learn about it, love it... manage it (even with the help of others). Your couch might become more lonely, but your business will thrive.

 

 

Data references:

1. StatsCan

2. US Bureau of Labor Statistics