Smart Financial Risk, Christine Luken, Financial Lifeguard

Smart Financial Risk Taking

Smart Financial Risk, Christine Luken, Financial Lifeguard

Smart financial risk taking is woven into the fabric of the entrepreneurial life.  If you’re a risk-adverse small business owner, it’s likely you’ll have ulcers and empty pockets before too long.  When it comes to managing your money within your business, where is the fine line between smart financial risk taking and recklessness? Being too scared to invest money in your business is just as detrimental as taking out a bank loan with no solid plan for how you’ll earn the money to pay it back.

You have a genius idea for adding a new product line to your business offerings… but would need to borrow money to get it started. Is that a calculated risk or a careless one?

You strongly feel that you need to hire a business coach to take you to the next level… but would be dipping into your savings to pay her. Is that smart financial risk taking or recklessness?

Your business is bleeding cash  fast so you decide to take on a partner or investor. Is that a calculated risk or are you playing with fire? 

Smart Financial Risk Taking or Recklessness? Here are the questions to answer:

  • Am I acting out of desperation? If you are going to borrow money or bring on a partner or investor because your business is swirling around the toilet bowl, this is probably a reckless move. Borrowing large sums of money or altering your business ownership is not something that easily reversed once the decision is made. If there’s a serious problem in your business, throwing more money at it without fixing the underlying causes will only prolong the inevitable and make you worse off financially in the long run.

  • What impact will this have on my personal finances? I’ve seen entrepreneurs make reckless business decisions because their personal finances are a disaster. When you have your eye on short term cash flow into your own pockets rather than long term growth and stability of your business, opportunities for reckless decision-making abound. Also, be very cautious about risking too much of your personal net worth for the sake of the business.

  • Am I letting go of an activity, customer, or product line that no longer serves me? At times, our financial risk taking involves doing less rather than doing – or spending – more. It can be difficult to stop doing something we’ve always done. Maybe you need to fire a high maintenance customer who is a drain on your time and your joy. You might need to stop selling a product or service that occupies an inordinate amount of time and effort but has low profit margins. It’s scary to let go of a current cash flow stream, even if it’s just a trickle. But sometimes cutting away the mediocre to make space for better customers and opportunities is a smart financial risk. What would you have the time and energy to pursue if you cut customers, products, or services in your bottom 20%?

  • Do I have a plan to pay back any debt that I’m incurring for this opportunity? People tend to engage in riskier behaviors in business when it’s other people’s money on the line rather than their own. Borrowed money magnifies risk. If you are going to borrow money from the bank, friends, or family members for this venture, have a solid plan from the get-go for paying it back. Preferably, ahead of schedule!

  • Am I investing in a potential recurring income stream? You’ve heard it a thousands times: “It takes money to make money.” You should strongly consider investing capital into products or services that are potential on-going cash flow generators. There’s nothing better than doing the work once and getting paid for it over and over again. Maybe you’ve been toying with the idea of creating an online video course that clients can purchase on your website. You’ll need to invest your time to create the videos, plus pay a professional videographer to film and produce them. Yes, costs money to create an online course. However, once it’s completed it doesn’t consume any additional resources and continues to make you money as long as there is a demand for your expertise.

  • Is this money move one that other successful businesses in my industry are making? Study the big players in your industry and watch how they operate. What needs to change in your business to play at that level? You may need to take interim steps to gradually climb to those heights, but you should be moving in that direction.

  • Is my spouse or partner on board with this financial decision? Why would my spouse’s opinion matter, if they are not directly involved in my business? Your partner knows your strengths and weaknesses better than anyone else on the planet. He or she is the best person to reveal any weak points in your plan and blind spots to which you may be oblivious. And if this financial decision goes south, it will very likely affect your personal finances and thus your family as well.

  • Will this expense or investment leverage my time? If you’re hiring someone in order to delegate things that aren’t the best use of your time, that’s a great investment. By removing lower-level tasks from your plate, you have more time to spend on the activities that make your business money. I read this in a book some time ago, “If you want to be a millionaire, you won’t waste your time cutting your own grass or cleaning your own toilet.” It’s not that you’re too good for those tasks; it’s just not a productive use of your time. It frequently pays big dividends to hire an assistant or subcontractor to answer emails and phones, manage social media, or do your bookkeeping.

  • Will taking this financial risk light a fire under me to rise to the occasion? Sometimes we need to go “all in” to motivate ourselves to take actions that are outside our comfort zone. For example, I recently let go of a business client for whom I was doing bookkeeping work. I’m a Financial Lifeguard; my core business is coaching, teaching, and writing. Bookkeeping is not any of those things and I didn’t really enjoy it. Why did I bother with it? The job paid me about $2,000 per month and it was like a security blanket for me. However, it was occupying 25% of my available work time that could be spent on more meaningful work. Giving up that client is a calculated risk that’s lighting a fire under me to pursue the clients I really want to work for.

Are there any other considerations that I might have missed when weighing financial risk-taking in your business? I’d love to hear from you.