Robust information beats betting
Monday, 16 June 2008
By Louis Coutts
There is that famous quip, attributed to an anonymous bookie but more likely to be the output of a genius in financial analysis, Professor Higgins of Stanford: “A guy ought to have a bet every day; otherwise he could go through life lucky and not know it.”
Regrettably, many people in small and large businesses do take bets based upon their “gut instincts” and discover that they will not go through life lucky.
Every day, people in business are making bets on the future of the business just as investors who buy shares in companies on the stock exchange are making bets on the future. It is said (only with accuracy in relation to successful investors) that once you buy a share and continue to hold that share, you make a decision each day to effectively buy that share. If you decided that it is worth holding then it must follow that you have decided that it is worth buying. If you decide that it is no longer worth holding, you quit the stock.
If people continue in their own business, they are deciding that it is worthwhile investing in that business, otherwise there would be no sense in staying in the business.
If we stop and think for a moment, it is worthwhile reflecting on the reasons we stay in business. Do we on a day-to-day basis evaluate our situation, look at key performance indicators and then make a decision, like “Gee things are great, look at the increase in sales of X”.
Or does the routine of operations preoccupy us until budget time comes along and we simply have to look at how we think we will go next year? Sometimes, things happen so quickly that budget time comes along and it is too late to respond to something that has already happened. In the meantime, we have decided to continue to invest in our business despite some catastrophic event. Think of the poor guy who was going gangbusters making solar panels!
Just take a step back. I am sure many people have purchased shares. What do we think of when we are making the purchase? Are we thinking about investing in the business whose shares we are buying?
If not, we should be. We should be asking ourselves “is this a good business in which to invest”. If you ask that question, you are likely to want to know a lot about the company and particularly where it is going and its sustainability. The past is history and might be some indication of where you are going, but the future is where you want to be and you need to know what it promises.
One of the more dramatic events that disrupt the equilibrium of a business is the loss of a customer who represents a large slice of sales. Sometimes, there is a belief that a business has multiple customers, whereas it might only have one.
For instance, the cork industry in Portugal thought that it had multiple customers, being the different makers of wine around the world. Ask them that question now. “We didn’t see it coming. We really only had one customer, which was the wine industry, and we messed them around so badly with bacteria ridden cork that they have dumped us and have gone for the screw cap.”
The industry that supplied cork to the wine market is decimated and will never recover. It took a huge bet on one customer, didn’t look after it, and now is finding out how unlucky it is.
So, when you are looking at your business in an attempt to see forward and decide whether or not it is worthwhile continuing to invest in your own business, there are lots of questions you should ask of your own business just as you would of any company’s shares you decide to buy.
However, as the budget time is coming up we can narrow the range of questions at this stage to one, and that is “how stable and risk free are future sales and what will these sales generate by way of income over the next year?”.
If you manufacture solar panels, it is a bit late to ask this question but not too late to decide whether to continue to invest in the business. That is where you have to decide whether you are just going to place a bet in the hopes you will be lucky or are you supported by robust intelligence about the future.
In the past I have mentioned the competition guru from Harvard, Michael Porter. He has identified the five competitive threats with which we are daily faced. However one threat that he didn’t mention is government. It is as insensitive as a piece of rock. There are many organisations that are dependent upon government contracts. However, once the government decides to change its mind (ask the gambling industry) you take a hit because of a double whammy.
One is you are exposed to government policy which can change overnight, and secondly you are dependent upon one customer. The solar panel maker might not have recognised that it was dependent upon one customer, but having taken the bet and lost, it will now realise how exposed it was to a bad bet.
So, looking forward to the coming financial year, some information that will be of help when identifying how safe it is to continue to invest in your own company is to look at your exposure to customers. “Am I dependent upon government?”
If so, it doesn’t matter how many customers you have; you are taking one hell of a risk and taking a bet on that business without having contingency plans creates a high risk of you running out of luck. If you are dependent upon one customer, chances are that your luck will run out one day.
Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.
To read more Louis Coutts blogs, click here .
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