A significant portion of managing a business is managing risk. Steve Layton, founder of Sofa Brands, explains that if you can manage those risks wisely you can seize opportunities to help your business gain an edge in the market.
Running a business is a balancing act between managing threats and pursuing opportunities: spend all your time and effort on threat reduction and you stagnate; chase every opportunity and you undermine what you already have. The key is to lay a stable foundation where you can take calculated risks. If they pay off, you achieve an edge in the market; if they don’t, you have a fall-back position that protects your business from sinking altogether.
Here’s how to plan for and take calculated risks.
- Ration your fuel
Every business should have a solid business plan behind it. It is critical that this is clear and detailed, right down to how much time you will invest in it, and how much money is required. Any cash burn should be planned, not unexpected. Of course cash burn is okay, but plan what resources you can spare for projects so when you want to test an idea, or an opportunity comes along, you know how much you can spend in time and money.
This also means if you exceed the break-even time frame, you need to be prepared to make a tough decision and close the business. Be disciplined on this point to avoid sunk cost fallacy – throwing good money after bad.
- Have a Plan B
Nothing ventured, nothing gained, or so the saying goes. But if you put everything into Plan A and it doesn’t work out, you also end up with nothing. So don’t put all your eggs in one basket, take a risk on a disruptive business model but always have a fall-back position.
One of my customers was the first in Australia to open a ‘big box’ style furniture store. Big box retailers were all the rage in the USA at the time but unproven in Australia, so it was a risk. When he built the store, he designed it in such a way that, if the big box format didn’t work, he could later divide the building into smaller tenancies. The model turned out to be a success, changing the furniture retail landscape in Australia, but it might not have turned out that way. Contingency planning minimised his risk.
- Dip your toes
Making a small investment to test a market can save you risking a much bigger investment. If you have a new product, you can start with a limited range to see how it goes, but make sure you can scale up effectively if the idea takes; if you’re a service business, try a pilot program.
In the mid-2000s we developed a new sofa covering called ‘bonded leather’, which was a reconstituted blend of leather fragments, polyurethane and bonding agents. The look and feel were like leather but at a fraction of the price, which had the potential to change the market due to lower retail prices never before seen. However, we weren’t sure how the consumer would react to this new product. We negotiated with our material supplier to ensure that minimum order quantities were manageable so that we didn’t have to produce too much stock and did a ‘soft launch’ of the new range. The consumer acceptance was immediate and we were able to ramp up production quickly to meet demand.
Always tread softly with something new and untested, but make sure you can meet demand if it sells beyond expectation.
- Look to the future
To really make the most of a business you need to add value, or it will stagnate. This is especially true if you’ve bought a business rather than nurtured one from a startup.
When you buy a business based on a ‘multiple of profit’ valuation, you need to scale that business or increase margins to justify your investment. Always go into a deal like this with a clear road map of how you can add value to the business you are buying to minimise any potential risks. Apart from normal due diligence, this is a surefire way to ensure success.
To succeed in business, you need a healthy respect for risk and a solid foundation of good planning, discipline and vision to pursue opportunities. Innovation and calculated risks go hand in hand and that will give your business the edge it needs to push forward in the market.
Steve Layton is the CEO and founder of Sofa Brands and a longstanding key player in the Australian furniture industry.