Herald: Are you being conservative in your business?

Are you being conservative in your business?

08 Jul 2019 03:39am IST

Report by
Sunil Dias

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08 Jul 2019 03:39am IST

Report by
Sunil Dias

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. So, how do you decide which risks are worth taking and which are plain foolhardy? While there’s no certain way, this article looks at signs that you aren’t taking enough risks, or being too conservative. 

Businesses grow more risk averse as they mature or become stable. Adults wouldn’t think of getting onto a seesaw; a child happily does. As adults, we prefer sure gains over uncertain gains. A seesaw seems inherently risky to an adult, and with uncertain gains. A child sees it as one more item to discover. And possibly have fun and more importantly, learn. 

In the early stages of business, it’s necessary to take risks to grow or even survive. Risk aversion at this ‘childhood’ stage can have long term impact on development. For a stable or mature business, there’s much more to lose. There are large fixed costs to pay, revenues to defend and a significant reputation to keep safe. The chances of a mature business taking existential risks such as making significant investments into a new business or expanding hard and soft capacities of an existing business prior to actual demand are low.

So, mature or stable businesses are more risk averse. And some of the reasons for lower risk-taking have merit. Yet, if you don’t take any risks, there is one risk which always remains. The risk of doing nothing. Sometimes, businesses get so caught up in protecting what they have, that they miss the bus to something which revolutionizes their industry. And makes their existing products or services irrelevant. It’s happened time and again. A Kodak engineer invented the first digital camera in 1975. Yet, Kodak didn’t produce or market the product. It felt that it would cannibalise the sales of its films- the reels which used to go into a camera in the pre-digicam era. They introduced digital cameras 18 years later! They never managed to make a mark in the digital camera market. Kodak filed for bankruptcy in 2012. 

So, how do you know when you are being too conservative? There are 5 signs

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 push. 

That means you need to make investments of time and money. Besides understanding your target customer, you need to identify the channels to reach your target customer. And run marketing campaigns to make sure that your message is being heard. Marketing spends may seem inherently risky, since it’s difficult to quantify their impact on lead generation and sales. And there’s trial and error involved before you get your marketing spot-on. Yet, there are very few successful companies that have not spent decent money on marketing. How has Amul remained a dominant player in the milk and milk-based product segments? Not merely because of their product innovations and distribution muscle. But also because of their consistent marketing efforts across marketing channels. Fevicol is another great example of consistent marketing being an important component of their sales growth. 


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 prior to maturity. Yet, if for every loan you end up repaying within 50-60% of the maturity period, it may be sign of conservatism. You might be underestimating the ability of your business to generate future cashflows to service debt. And are being conservative while raising finances. This starves 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 utilising 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 prior to demand. That way you don’t lose sales by being unable to meet demand. It follows that there will be times when capacity utilization is average and then moves up as demand picks up. 

That said, don’t go overboard while planning capacity. The idea isn’t to build a palace and then search for a King. It’s to introduce capacity so that you are a few quarters ahead of expected demand. 

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. 

Sign #5: You spend significant time on daily operations 

For a business to expand, the leader needs to focus on strategy, not day to day operations. If a business is unwilling to pay competitively for great managers, the founder will very likely spend significant time on daily nitty gritty. That leaves little time for the leader to focus on initiatives which will drive future growth. And stifles the future of the business. Your ideas and your sense for market opportunities has brought your business so far. Give yourself the time you need to spot and respond to future opportunities. The time spent in understanding and planning for these may be the difference between great growth and stagnation.


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 together with inertia. So, the next time you find yourself not doing something because you perceive it as too risky, ask yourself this question- “Are the potential returns on taking this risk significantly higher than the downsides if this risk is realized?”. If the answer is yes, go ahead and take the risk. As T.S. Elliot said- Only those who will risk going too far can possibly find out how far one can go. Great things never come out of our comfort zones. 
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