Catastrophic Risk & Sustainability
I want to build operations that last 100+ years.
This means my efforts are focused on risk mitigation over performance. I miss opportunities and am not growing as fast as I could be. I optimize for survival. When you optimize for performance, you lower your longevity. We see this in diets, machines, and business operations.
When creating a strategy, I want to know where the risks are, and where they lie in regards to potential payoff, and potentially ending the game for me.
Revewing the environment, I like to highlight those that might help, increase cash flow, are tempting... but might create a game over scenario. Let's imagine a universe where we know which ones will fail (red) and those that will realize their payoff (yellow).
We want to avoid risks that could payoff, but might end our business. These risks will change over time as you grow, develop expertise, and evolve as a company. What might put you out of business in year 1, might be no problem in year 3. Like what?
- losing a major customer that covers most or all of the overhead
- tax problems with the IRS
- key person leaving
- key equipment breakdown with no ability to replace
- running too small a margin on big jobs
- not having a cash buffer
- overleveraging
- overstocking in inventory
The list goes on.
When it comes to small business risks, it helps to build a scope around where you
- have the capacity and capability to participate
- cut out the catastrophic risks as much as possible
You can't avoid all risk, but you can get rid of as many of the catastrophic risks as possible. Building a sustainable organization is more about filtering these out than taking the highest payoff risks.
You WILL miss opportunities. You need to be ok with that. Again, I like to optimize for survival and longevity. I am happy to let opportunities pass and watch others capitalize on them without regret.
Once you cut out the risks that aren't worth it because of payoff or catastrophic risk, you can start to change the dynamics by building operational capacity and capability.
Maybe taking on a customer too early might end your business if you mess up the order, part, service, or sale? However, once you are bigger, with more talent, and better in-house experience, that client would be no problem. You have built operation capability and capacity to shift your opportunity set and risk profile.
