The Entrepreneur’s FD: If anything can go wrong, it will go wrong

Have you noticed how some newspapers glamorise entrepreneurs who have failed three or four times before they succeed. This is justified by saying that these entrepreneurs are risk takers and should not be punished for sticking their necks out and taking some risks. Richard Branson is often cited for his failures as often as he is about his successes.

Many commentators say: “You learn more from failure than you do from success.” While there are elements of truth about this, in many cases business failures can be avoided if the entrepreneur concerned had taken a broader view of the risks that his business faced during its initial growth phases.

In a US Venture Capital Survey, it was found that 34% of second-time entrepreneurs whose first venture succeeded, succeeded again. Only 23% of those that had previously failed managed a success, while 22% of first-time entrepreneurs succeeded.

As finance directors, we see too many business owners who have tunnel vision when it comes to their businesses. Consider a business as a racing car in an important race and the driver is the entrepreneur. Does a good driver focus on the finish line, the steering wheel and the accelerator only? Or would you expect a good driver to also consider the use of the gears, unpredictable behaviour by other drivers and the performance, reliability and safety of his car?

A business owner needs to think beyond the big deal to start thinking “what could go wrong after I secure this potential order?” Maybe component delivery is late, a sub-contractor lets you down, a product fails, isn’t legal, or a customer complains if the product is not fit for purpose? Perhaps a delivery is rejected due to transit damage, incorrect paperwork, you deliver the wrong products, your costings are incorrect when agreeing prices, your bank facilities are withdrawn and/or there are no credit terms from suppliers, you end up with too much of the wrong stock, or the customer does not pay.

Many entrepreneurs have left larger companies where these considerations are handled by others. When you are in the early stages of a business, your team may not be big enough to allow such delegation or support. Consequently, team members have to do things that they have never done before and this exacerbates the risks enormously.

To remedy the situation, management teams should take the opportunity once a month to consider what could go wrong and identify ways of reducing the risk of what could happen. The most common mistake is for entrepreneurs to develop too many products at the outset without proving any of them will stand up as a success. By their very nature, entrepreneurs are very optimistic.

Therefore, considering the risk of failure does not come easy to them and, as a result, many entrepreneurs try to delegate responsibility for dealing with Murphy’s Law to other members of the team without giving them any authority to say “no” to anything. In reality, all this does is provide a scapegoat when things do go wrong.

As financial directors, there is a perception that we will prevent Murphy’s Law dragging down the business. In early-stage companies where the opportunities for something to go wrong are so numerous, preventing everything that could go wrong is an impossible task. As a result, the majority of our time is spent focusing on the fallout from Murphy’s Law – minimising the financial impact when things do go wrong.

From our years of experience as financial directors, our four top tips are:
• Identify what you are going to do (ie product or service) and don’t be distracted by other ideas. Do what you do as well as you can and you reduce your chances of becoming a busy fool.
• Dedicate half a day per month to consider what could go wrong and put measures in place that help prevent it.
• Plan for other things to go wrong and make sure you have the skills in your team and financial resources to minimise the financial impact.
• Be honest with yourself and generate a team spirit that deals with Murphy’s Law, rather than blaming employees or suppliers for your failure after the event.

James Nicholson-Smith is a regional director and co-founder of The FD Centre