In this part of the multipart series: “How Small and Mid Sized Firms Grow” deals with taking calculated risks and doing a cost/benefit analysis.
Business is all about taking risk. If you are not willing to take risks you should not own a business. This brings us to the subject of probability. There are no guarantees that even the best analysis will lead to intended results, but it does increase the probability of the outcome being right, that is the odds are increased when you analyze things before you act. Then we have the cost/benefit analysis, or ratio of how much it costs to do something compared to the potential benefit derived. If the cost is very low you might be willing to make a higher wager even if the probability of succeeding is low. Likewise if the benefit is very high you may make a wager knowing the probability of winning is very low. These two events help explain why millions of people buy lottery tickets.
But there are different kinds of risks. A decision based on a hunch is not a wise bet unless the stakes are rather small and the payoffs high. There are hunches which are based either on prior experiences or just ones feelings or instincts. Those based on prior experiences are often a short cut of all the calculations that go into an analysis and may work out well when the conditions are the same as those seen before.
We will concentrate here on how most well run companies evaluate risks. This is by reviewing your options and only then deciding which among them are the best choices to make. Good business people start this process by narrowing down the choices before they start their analysis or analyzing the choices become overwhelming. But they need the facts, not all the facts mind you, just the critical ones or decisions will lead to procrastination and never making a choice. Facts may change however due to things like the economy, competitive conditions, the staff you have to implement things, wildcards, etc. So a periodic review of your “facts” is necessary. What might be a good decision today may not be good later. These things may change facts into variables and should then be treated as such by running various scenarios under different conditions. Also don’t prejudice your decision on which risks to take before you do an analysis or you will influence the outcome, consciously or unconsciously.
So let’s try an example. You are considering opening a new office vs. expansion of your existing facility. You can pin down the market demographics, fixed costs and investment, manning levels and comp plans, your competitive advantages, the number of competitors, available, line of credit and capital, etc. You have as variables, future economic conditions, prices and margins, demand and volume, competitive reactions, etc. So you then run out multiple scenarios using as constants the things you pretty much know and making changes to the variables to see which of those cases give you the best sales growth, increased profits, value of your company, low likelihood of wildcard events, have favorable cost/benefit ratios, can still succeed even with changes in staff, fit within your budget, etc… and select you best option. We will deal with tracking results and making changes in future discussions.
In the last blog, we discussed having a vision for the future. A vision must be converted into action if it is to be more then wishful and then weighing the risks of those actions.
We welcome your questions as to personal and business challenges you face in order to grow
Optimal Management is the premier management consulting company to the staffing industry. We act as mentors to owners and managers to maximize their sales, profits and value of their company. We become an extension of our clients operations and are there for all of their staffing and business needs, from sales, marketing and compensation plans, to finance, M&A, general management and everything in between.