Each month in this column I ask a different question to you, the ExitEvent Entrepreneur. Thought provoking questions that are meant to get you to sit back and think. Each month I offer insight into the question, along with common mistakes made by (us) entrepreneurs, and a key take-away for you to think more about. My goal – to increase your self-awareness as an entrepreneur and a leader.
Insight: There is nothing better than being an entrepreneur in a fast growing business, is there? The energy level is contagious, the activity level always at an accelerated pace. The sheer enthusiasm we have for our work is unparalleled, and our non-entrepreneurial friends can’t believe how happy we are on a daily basis. Bring it on—more growth, more revenue, more employees, more customers!
You are in the driver’s seat of a success story and are living the dream, not even thinking it could change. How could it? Why would it? And most certainly, not for me, right?
Because it always does. Trees don’t grow to the skies.
Common Mistake made: Entrepreneurs are eternal optimists. We see the good in just about everything. We simply don’t expect things to get harder, or worse, to turn south…but they will, eventually. In the past 27 years of my serial entrepreneur existence, my businesses have shed their leaves many times. Yes, they eventually bloom when spring arrives, but there are those dark, cold days of winter to get through before that time arrives.
I was guilty of thinking that downturns in business may happen to other people, but not to us. We are too smart for that. Wrong.
Ultimately, we all struggle, for a variety of reasons. Some are our own fault. Others are driven by the economy or industry change/disruption.
The mistake made by entrepreneurs is not being optimistic—it’s not thinking about a contingency plan prior to needing one.
Key Take-away: Contingency plan—a course of action to be followed if a preferred plan fails or an existing situation changes.
Every year we put our budgets together for our businesses. For optimistic entrepreneurs, those are the best case scenarios which we truly believe we are going to not only meet, but exceed. Why settle for less?
The larger we grow our businesses, the more fixed expenses we add and the higher the break-even sales and gross profit needs to be to ensure we make money. We have taken on more risk, which is simply what we do; good for us. Except, if the business slows and the challenges begin. I was not as prepared as I should have been for the (occasional) brutally cold winter days that sometimes extended into month(s). But I could have been had I understood the positive aspects of the contingency plan.
Here is a training exercise I recommend you implement next time you put together your annual budget. Use this exercise as a learning experience to help you gain additional financial leadership in your organization.
Think about three different budgets. The realistic budget, the stretch budget and the contingency budget. Make sure you can make your profit goals with the realistic budget. When you exceed it and move towards the stretch goal, it is all icing on the cake.
For the contingency budget, reduce your realistic budget revenue by 30%. Then set a profit number that you would accept if indeed your business took that much of a hit to sales. Let’s assume you are okay with making zero profit with a 30% decline. The contingency plan is all about reducing expenses prior to having to actually take that step.
With this exercise, you will have peace of mind knowing that even if sales took a gigantic hit, that you would have the ability to lead your business through the dark winter days.
Expect change. It is a given in the entrepreneurial world. If you can add contingency thinking and expertise to your business—understanding that growth will be interrupted at some point—you can have peace of mind and trust your financial leadership during all times, not just when the trees and your business are growing wildly towards the skies.