Porter’s Points: Don’t Risk What You Can’t Lose

March 30th, 2009 by Sharon Larsen

Today we’ll finish up with Rich’s thoughts on setting boundaries in your small business with a personal example.

 

 

Let me share one last experience. This is a painful story to tell, not only because my lack of good judgment regarding a cardinal rule cost me the business, but because it almost cost me a trusted friendship.

 

Every good investment plan has a “stop-loss” provision built into it. Your business should have stop-losses built in as well. A trusted friend and I were engaged in a business called Eggnesters. Having previously learned the stop-loss lesson the hard way, we established rules up front. One such rule followed the counsel above—we set up stop-losses in case the businesses took a downturn. The rule was simple: establish a $100,000, three-month buffer. If the buffer ever dipped below the threshold, we had agreed to reduce expenses to allow for a positive cash flow.

 

After several years of mind-blowing success, the business took a downturn. Before long, we had crossed the $100,000 threshold. What did we do? We changed the rule. We didn’t even put a lot of thought into changing the rule. We just changed the buffer to $50,000. We knew we could pull out well before we spent that next $50,000. So what if the market was volatile?

 

Repeat the scenario. We crossed the threshold again. We were not going to be able to pull out. What did we do this time? We came up with a new business idea. Sounds like a smart move, right? It could have been, but even though our current team was not suitable for our new venture, we kept everyone on board. It was a loyalty thing. We watched the numbers and saw right away that our plan was not going to work.

 

Our gut told us to stop. Despite the warning, we held on until we were actually going slightly negative. What was the end game? With no ramp or buffer with which to juice our next endeavor, we had to completely layoff the entire team, terminate the partnership, and part ways.

 

As hard as it seemed at the time, the best thing we could have done was reduce expenses and regroup when we got to the $100,000 buffer. By accepting the need for a few layoffs and cutting some costs, we could have saved our most valuable employees. We could have saved a good partnership. I would have avoided significant personal frustration if I had paid more attention to both sides of the tug-of-war. Instead, I let commitment tug me along and watched as my clear-headed detachment got dragged through the mud.

 

Porter’s Points – Don’t Risk What You Can’t Lose

 

  • You generally know what you can’t lose. Most people do. Why do they risk it, then? Usually, they are addicted either to prior or current success. Recognize that tendency within yourself and compensate with open-minded objectivity.
  • Always take time to back off and assess your progress, even when things are going well. If you get in that habit when it’s smooth sailing, it will be that much easier when the water gets choppy and you have to enforce a rule.
  • Never risk what you can’t afford to lose. If you can’t afford to lose it, don’t risk it. End of discussion.

 

 

That concludes Chapter 5: The Rules.  Next time we’ll start Chapter 6: Boring!  It won’t be as bad as it sounds….

 

 

 

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