Surviving Incoming Risks: Continuous Red Lining versus Bird Strikes
You are an entrepreneurial mover and shaker. You lead your business and are always pushing your team to produce the maximum and to hit exciting stretch goals. Everyone always wonders how you keep hitting new growth milestone after new growth milestone. When most other businesses ebb and flow, for you the only way is up.
Your business may feel like a Formula 1 or NASCAR race car, complete with a full complement of Drivers, Engineers and Pit Crew. It runs lean, with no waste, lollygagging, or room for error. You know your business could be a case study for efficiency highlighted by Harvard Business School.
Yet despite this, an inner part of you does not rest easy. It whispers to you in the dark of the night …”but what If…”. Still, like every positive and high performing entrepreneur, you shrug it off. Come the morning, you silence your inner Debbie Downer, climb into the driver’s seat and get back into the fray.
Yet, if you study how Formula 1 and NASCAR race crews actually operate, you’ll discover that this quiet voice at the back of your mind actually has a point.
While the engines in these driving machines are very high performing, they cannot be run at maximum revs (known as redlining) for an extended period of time because they will come apart in spectacular fashion. Typically, it happens at the worst possible time.
This is not a good thing when the aim, at a minimum, is to finish the race in one piece while the ideal aim is to win the race.
These engines are built for endurance, but also to perform at peak performance for short bursts (such as when overtaking other drivers on a straight section of the track).
It turns out businesses and their internal teams have a similar risk profile.
You cannot run a business’s budget at maximum leanness and minimized expenses for long stretches without a negative consequence. Just as a race car’s suspension system needs to be able to handle a blemish in the road surface, the financial operating margins in a business need the room to absorb some unexpected one-time items.
You also cannot redline your people for long stretches of time. While everyone has different individual capacities, after an extended period of months working excessive hours each week, you risk having the wheels come off. One or more people will experience burn out, a negative health event, a family crisis, or the urge to escape. The impact of this will then snowball if there is no ability for others to pick up the slack that temporarily results. Backlogs and bottlenecks develop and the negative consequences will domino through the organization. You actually need sufficient headcount to handle the busiest of times without breaking your people.
There are also external risks, some of which are routine to your business, your industry, or your geography, along with others that are not normal. These others are the Black Swan events. These used to be merely a theoretical curiosity, and the bad luck events that afflicted others once in a generation. But Black Swan events are not merely “the unknowables” which defy prediction. They can impact an entire nation. 2020 has proven this.
Take the aviation industry. Companies plan for (simulate) bird strikes – where birds are sucked into the jet engine during flight, especially during take-off, which can result in the destruction of the plane (and everyone on board) – by catapulting defrosted frozen turkeys into running jet engines (using an air cannon) to ensure that they can survive these events.
Maybe they should upgrade the bird size to swans now.
In short, there are monsters under the bed. They do bite. At the very least, you could lose a leg. Time to start packing kevlar leggings. These are true C-Suite issues. They should not be delegated.
The Escape Route
This starts with the Finance function:
Building in a zero-based forecasting/budgeting mindset is a key step forward in mastering your cash flow over the long term. This means you have the general funds available immediately for emergencies, because you allowed for but did not need to actually use certain funds in prior quarters/years.
This is not sandbagging. This is indicative of a strong team, with a true holistic overview across the business, which executes well on actual events on the ground. This also builds up a pool of retained earnings that can be tapped into during emergencies, hopefully sufficient to see you through even extended duration emergencies.
Capital reserves and operational reserves are no joke. The entire economy found out the hard way in 2020. These reserves are not for distribution to ownership as excess profits, even if the legal structure of the business entity is that of a taxation passthrough entity. If your ownership has a self-control problem with this then most likely it needs to change to a different type of legal entity.
Next comes the Human Resources function:
Each of your core roles and responsibilities needs to have documented job descriptions. They should be 80% systemized and documented so that someone else can step into their shoes and follow the written procedures enough to keep the wheels on the bus in the event of their absence. One step better is to always have two other people who have been cross-trained in the role and who have spent several weeks in the role fulfilling it on a full-time basis.
Doing this, you reap an additional benefit: your training up of new headcount gets much quicker and easier (and hence cheaper). Your new hires also realize how well organized their new employer is!
Finally, we have the Technology function:
Every good business needs to automate their standardized steps in their business processes. This makes businesses scalable in a non-linear manner, once they get to specific inflection points in their size and growth. This also provides you with data in the form of Key Performance Indicators – ideally both leading indicators (about the future) and trailing indicators (about your past) – to keep your business on the right path (usually growth, and always profitability) as you navigate the constantly changing economic circumstances.
It’s pointless to build a business for years, or even decades, and to run it so lean that one unexpected economic pothole causes the wheels to come off and everything to disintegrate.
That is the true name of the game: to stay in the game. Weather every storm without breaking so that, when others spin out and crash, you are still running effectively and can pick up the true treasures in terms of talent, customers and assets.
Our experienced team of Consulting COOs help business owners and CEOs to ruggedize their business “vehicle”, and their businesses to endure the expected potholes on the road to success as well as the unexpected pockets of turbulence. We deliver real solutions. Not just paper opinions.
To strategize together and to get the expert support necessary to reach your future business milestones, count on us. Let’s Zoom or even meet.
Peter Gray brings years of comprehensive operational management experience to our clients seeking guidance and surefire methods for top operational performance. He helps business executives to develop and grow their businesses by offering expert ways to implement their operations, finance, growth and product management. He helps companies to integrate innovative methods and strategies so they function effectively.