Preface: “A prudent man foreseeth the evil, and hideth himself: but the simple pass on, and are punished.” Proverbs 22:3
Productive Foresight
Credit: Jacob M. Dietz, CPA
Have you ever heard someone say “I wish I had seen that coming” after a bad experience? If we knew the future, then we could act accordingly. If we knew that the bull in the pasture would charge us ferociously next Monday but not the rest of the week, then we could avoid the pasture next Monday. Every other day we could walk carefree through the pasture.
For better or for worse, we do not know the future. We encounter risk every day. Thus, we can know that there is the possibility of catastrophe, but we may not know when it will hit. Not all risks, however, are equal. In Great by Choice, Authors Jim Collins and Morten Hansen explain 3 types of dangerous risk. Minimize and avoid death line risk, asymmetric risk, and uncontrollable risk.
Death Line Risk
In business and in life, know the risks that face you. Some risks are mild, some are deadly. If the snorting bull kills us on Monday, then we cannot learn our lesson and stay out of the bullpen on Tuesday. It is too late.
In business, death line risks could literally kill you or an employee. Although death may ultimately be unavoidable on this earth, there are steps businesses can take to avoid various kinds of unnecessary death. First, practice safety to avoid physical death. If an employee falls a very small distance, they might hurt their back. A hurt back is no fun, but at least they have a chance to learn a lesson. If they fall 30 feet, they may not recover to learn a lesson. When analyzing safety, consider how close you are to the death line. If you employ workers, consider their lives a top priority in your operation. An employer will not know when the accident will happen, but with foresight the employer may be able to prevent an accident.
Secondly, watch out for financial death. When doing a business transaction, ask yourself if it would take you out of business if the transaction went south. For example, what would happen if you cannot pay back a large loan? Would the lender pursue some type of peaceful arbitration and resolution, or would the lender sue you to recover every possible penny?
Suppose that you are taking a new product to market. What happens if the product fails to perform? Know your customers and the uses of your product. If it is a very important product that would be costly if it broke, then ask yourself if you can remain in business if the product fails.
Thirdly, avoid risks that cause spiritual death. Mark says it well. “For what shall it profit a man, if he shall gain the whole world, and lose his own soul?”
Asymmetric Risk
If the potential downside is significantly greater than the upside of a decision, then you have an asymmetric, or unequal, risk.
Be careful when you see asymmetric risks. If an entrepreneur sees a large opportunity, perhaps they will risk a lot for that opportunity. If they see a small opportunity, perhaps they will risk a little for that opportunity. Taking an asymmetric risk, unfortunately, involves risking a lot to get a little.
When making decisions, ask what the upside and downside is. If only the upside is focused on, then the business may take on an asymmetric risk unwittingly. On the other hand, if only the downside is considered, then a business may miss a good opportunity.
Imagine a business owner that wants to acquire another company and consolidate it with his company. He calculates that adding the new company could give him an additional $40,000 of net income per year. While doing due diligence before purchasing, the owner realizes that there is a $1,000,000 lawsuit pending against the company he wants to purchase. His attorney looks at the circumstances, and indicates that the lawsuit, if successful, could hurt him if he purchases the company. In this situation, the upside of an additional $40,000 of net income per year pales in comparison to a $1,000,000 legal judgment.
Think back to the last contract you signed. What was the upside, and what was the downside? If you are thinking of acquiring some new equipment, consider what is the upside and what is the downside.
Uncontrollable Risk
There are many things which a business owner cannot control. Entrepreneurs may not be able to control the weather, other people, public health, civil elections, gravity, inspectors, and the list could go on.
Be aware of these risks and focus on what can be controlled. For example, a construction crew cannot control the wind. They can control, to a certain extent, which day to set trusses. If the wind will cause a huge risk, it may be better to wait. On the other hand, if the entrepreneur is running a restaurant, then it may be safe to operate the restaurant in the wind. The food inspectors may be what worries the restaurant owner. Again, the restaurant cannot control the food inspectors. The restaurant can, however, take steps to implement safe food policies to minimize the risk that the food inspectors will cause problems.
Use caution when the risk is out of your control. Is there a way to bring the risk into your control, or take steps to alleviate it? For example, dairy cows may not do well in certain weather. The weather cannot be changed. The environment of the cows, however, can be changed by building a barn. For another example, consider the squirrel. The squirrel cannot control when the nuts will be ready on the tree, and when they will not be ready. When they are ready, however, the squirrel can minimize the risk of starving by storing up some walnuts for the winter.
For your business, what are the risks that you cannot control? What can you control to alleviate or lessen these risks?
Productive Foresight or Worry?
Proverbs explains that not only does the prudent man see the evil, but he does something about it. Entrepreneurs could put themselves to sleep reading about all the risks in business that are stalking through the land, or else they could keep themselves up at night worrying. Worrying does not help. A reason business owners should be considering the risks is to take action to hide themselves from the risk.
First, how can a business owner have foresight? Does that mean they can see into the future? No, business leaders do not need prophetic insight into the future. Careful study, however, can give them clues about the future. Reading good material, asking good questions, and associating with good people may give business owners insight into what might be coming, although they do not know exactly what the future holds. For example, a business owner may be able to learn from other owners that certain problems tend to arise, such as with the weather or taxes or some other area. If the business owner feels the risk is substantial enough, then they might take steps to mitigate the risk.
After identifying the risk, what can be done to mitigate and lessen the risk? The simple pass on and suffer, but the prudent take steps to avoid unnecessary suffering. The reason to identify and discuss risks is not to be a doomsayer but to find solutions. In meetings were risks are identified and talked about, do not forget to come up with an action plan to mitigate the risk.
Although a farmer does not know that the bull will charge next Monday, a farmer can realize that the bull might charge someday. Therefore, the farmer might avoid being in the pen, or make sure the bull has a ring in the nose, or he might implement some other feature to protect himself from the bull.
Do Your Part and then Trust
Even the prudent will not always avoid catastrophe. Surprise events, such as unexpected weather events, changes in a bull’s temperament, etc. can harm the prudent. For these unpredictable events, let them go and trust God.
For other events, the prudent can take steps to protect themselves even though they do not know all the danger that is out there. Read good literature related to your industry and talk with the wise people in your industry. Through diligent study the prudent can foresee possible problems and take steps to alleviate them.
This article is general in nature, and it does not contain legal advice. Contact your advisors to discuss your specific situation.