This feels risky

05th August 2020

Each time you review your pension, your advisor asks you this question…

“What level of risk are you comfortable with?”

The investment strategy you pursue depends on whether you identify yourself as a low-risk, medium-risk or high-risk person.

It’s time we ask ourselves the exact same question again – this time as business owners.

You see, right now everyone is trying to figure out the best course of action for their company.

Is further pivoting necessary? Should we be investing in new opportunities if they come up, or conserving our cash? Is it sensible to bring people off the furlough scheme? Should we be building up capacity for the autumn and winter – or not?

It’s tempting to believe that there are “right or wrong” answers to these types of questions…

…And that someone, out there, can spell out for you the exact right strategy to follow, to survive – and thrive – over the tricky next few months.

It would feel great if that were the case, right?

But in the unpredictable environment we’re in, there are no clear answers.

The choices you make for your business right now depend very much on how much risk you’re willing to assume…

(…And your appetite for risk right now might be quite different to usual, as your attitudes might change under pressure.)

If you’re pretty comfortable with risk, for example, you’ll be more likely to change your business model to suit the new business environment – maybe changing the structure of your team, the way you deliver your services or even evolving what your business actually does.

And you’ll be more likely to seize opportunities as they present themselves to you – for example, launching a joint venture with another company.

If you’re more risk-averse, you might be tempted to ‘sit tight’ during this crisis, keeping things running as “normally” as you can, and keeping as many staff as possible on the books, until it’s clearer how things are panning out.

Both may be viable strategies for the same company.

But the deciding factor isn’t necessarily anything objective…

 …It’s just about how you feel.

That’s fine – but to make good decisions, it’s important to be a little systematic about it.

You need to map out the potential financial consequences of each approach (as well as a medium-risk approach somewhere in between).

With all the numbers in front of you – even vague numbers, which might be the best you can do under current conditions – you can understand the risk you’re really taking on…

Turning this from a decision based on a fuzzy gut feeling - into calculated risk.

To give you a pre-Coronavirus example, I’m not naturally a risk-taker. I understand fully that in order to run a successful business, you have to take some risk, but I prefer having as much security as possible.

Last year, we poured a significant amount of money into renovating Insight Associate’s ground floor. We wanted to make it much more welcoming and practical for visitors and we wanted the space to have more client meetings on-site.

So we created another meeting room, and upgraded the facilities available in the public space.

Now, this felt like a pretty “low risk” approach back in 2019… I’d looked over the finances carefully and not only could we afford the work, but it seemed like a very sensible long-term investment.

You’re probably laughing right now, because while I’m writing this from my office, the building is something of a ghost town…

Only a fraction of our team is here at any one time, and welcoming visitors to our office is impossible for the foreseeable future…

…At least short-term, it turned out to be a pretty bad bet!

I’m fine with that, though, because this wasn’t random spending.

I had run through all the numbers again and again before we started and already knew that if something went disastrously wrong (not that I ever imagined anything like COVID-19…), it wouldn’t kill us.

I was comfortable with that…

This was calculated risk.

This “scenario mapping” process is a key part of what we do as your outsourced finance department…

Because for us, managing your finances isn’t just about balancing spread sheets (though it’s about that too). It’s about helping you make better decisions for the future of your business.

You need to be comfortable with the risk you’re taking on – and that means understanding the potential financial repercussions!

To find out more about how we can help you manage your company’s finances, click here to get in touch with me today or call us on 01279 647 447.

Warm regards,

Garry

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