Monday, March 19, 2018

Three Factors of Risk Management (Tradecraft)

I'm meticulous about vehicle maintenance and that's because I believe most accidents and mishaps happen when three negative factors are involved. For example, a vehicle in poor mechanical shape could be one factor, such as the overburdened shocks I just replaced. Weather or road conditions might be the second factor. The third factor could be a lapse of judgment or another driver making a dumb mistake. I've found when those three factors come together, events out of my control ensue and people get hurt. Since I have a Jeep with a solid front axle that tends to wander if I don't pay close attention, I'm always driving at the speed limit with great care, with one factor in effect at all times. So what does this have to do with business?

You can apply the three factors of risk management to businesses as well. I was reminded of this with the Toys R Us bankruptcy and immediately did a quick risk assessment of my own business. Now, to be fair, if you've got three factors on your mind, you're always looking for those three factors, which is both a strength and weakness. In the case of Toys R Us, their three factors were: Unsustainable debt, failure to cultivate and maintain a Unique/Useful Value Proposition (UVP), and a failure to prepare for coming demographic changes.

Any one of these three factors could kill a small business. Two of these factors can be survived by a market leader like Toys R Us. But all three of these? That's death and I'll tell you why. If you aren't doing your job now (UVP), and you aren't positioned to do your job in the future (coming demographic changes), why in the world would I want to invest in your debt ridden business to keep it going?  Toys R Us is a classic example of sunk costs with no future, a hole you find yourself at the bottom of with a shovel. Stop digging. But whatever, I'm really not qualified to analyze Toys R Us, but I do see how their case applies to my small business.

I've got debt from expansion, much like a Toys R Us at a smaller scale. I have a Useful Value Proposition I wish were more Unique, but I acquired debt to better my UVP. I feel I have strength in meeting future demographic changes, as we're able to pivot and invest towards the future of experiential retail.*

I could rate each of these issues on a scale of one to ten and decide if my business is worth saving, or in my actual case right now, re-investing. That's actually what I did recently before deciding if I should personally re-invest. I've got one factor in play and two moderately risky factors.

I would call my current risk moderate if it were someone else's business but as I believe in the management, I consider the risk low. I certainly have way more going for me than the $460 million dollar a year behemoth that was Toys R Us. Let that sink in a moment. Now, driving my Jeep back from the GAMA Trade Show in a blizzard? That was three factors of white knuckle driving all day long.

* The most important factor is I'm still profitable, unlike TRU with their debt load, but let's ignore that for now. 

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