The Consequences of Running a Business While Ignoring Risk (Part 1 on Risk)
I've got, a confession to make. I need, to get this off my chest. As, a business owner we all make mistakes. I've. Gotta confess. And, we, are live, confessions. Of a business owner so, good to have you on the show once again Kim hey doing, doing. Super. Well thank you Charlie sir, how you doing well. Dude I'm really excited as you me as we kind of mentioned before the show I've got a new person, starting on my team today and I love it I have a new team understanding, because it's like the. Excitement, of what they're gonna be able to do it's really really cool, yes. We cannot wait to see and I'm sure a topic of future episodes also oh definitely. But today we're gonna get straight into it because this is a topic that cannot, be ignored and that is, risk and I. Almost, can hear the piano. Guys. Keep the eyes peeled if you watch this video we'll also then retarget, with a video of Charlie sliding around in jocks, just. But you have to watch all the way to the end otherwise you won't get it Oh. Teaser and a half right there but, this is a rather serious topic, now I've had a rather, alarming. Few. Conversations I wouldn't name anyone on the show but something that is becoming very very clear to me is, that some people just ignore. Risk and, don't, want to deal with it and I, can, just say this is gonna really, really really hurt when something. Like it goes wrong so, what, I'm really hoping we can cover in this show is kind of like making, risk, something, that the, average business owner isn't going to glaze over or think that it doesn't apply to them or ignore but, actually be skilled enough where they can accept risk and learn how to deal with it, yes. A hundred percent is, a very important, topic so, yeah. It's going to be interesting. To see how all the listeners or viewers feel. At the end of this so hopefully they can take it away and yet, do some actions, with it as well yeah. Definitely so take you through this, story because. This is where it gets a bit interesting so, I was on a phone call with someone and we were just discussing some things about business growth and all the rest and then, as, we, were discussing one, of these persons clients, they mentioned, that this client was responsible, for 65%. Of, their income so this. One source, of income.
65%. Of the business is. Relied around them and not, only that is this, person had mentioned that the relationship had. To get a little bit shaky and they were getting a bit nervous, so. I said, what, happens if this person leaves and, basically. I mean I'll just straight, out drop it they said we're. And. I said how long have, you had this, one client responsible. For this amount of income and they, said a good, two years I said, like at any point over these two years did. You feel, like it would have been a good idea to. Like maybe get some other clients, or do something - maybe like mitigate. This risk or, have some sort of prevention, in place so you didn't have this type of stress because, it was keeping him up at night like he was literally saying he was starting not to sleep and. He. Goes ah you know like I thought about it but then you know we got so busy doing the work and, then you know we're having a really good time with this client I just kind of never got around to it and I, said was, it worth it like you're at this point now where you're not sleeping, the relationship, is rocky like was it worth ignoring and he said absolutely. Not this is something where I'm like I really regret it now and I'll. Bet, there's someone out there listening, to this podcast that, is, already going, you. Know obviously, that's not a great idea one, source of income for a 65%, of the business but the story gets better as. We're. Going through things I noticed, another kind. Of risk if you will so. 65%, of the income coming, from one client reached number one but, then risk, number two, was. Platform, reliance. So. This person was essentially, running majority. Of their business through. Facebook. And relying, on Facebook and, I was like what. Happens, if Facebook disappeared. Overnight or like, you know I really don't believe Facebook will disappear overnight so let's just remove that but let's pretend what do you Facebook changed, their terms and conditions which. They do quite regularly, and. The. Way you're operating your business you couldn't do it like that anymore what happened then he goes straight. Up well. We'd be again and. I'm like how. Long you been doing this and, he goes are, at. Least a year. No. Point in the year did you have any of those concerns and the reply was a bit different was like Facebook's, just bulletproof like we're you know we don't really worried about you know if I or going anywhere my Karl interesting, really really interesting and then I said, has anything changed on, Facebook like since you've been on the platform and he goes well, actually, you know we used to get quite a little leads from it as well but that's kind of changed also and again it becomes more and more fascinating, when I spoke to this person it was quite clear that they've gotten so busy doing, the work that, this. Had become something. That they were just too busy to deal from again and that, was like you know when. You've got one risk you know that's like a multiple. No but, when you've got two it's like you're just increasing. The chances of your business, not being around tomorrow, like, more, and more I'm again but. The, story gets better. Well. How many just might say his I don't know, much more. So. I said. Well. This is where things get interesting as well this person the, way they were operating, their business is. From. A, negative. Cash flow cycle meaning they build someone after, they've done the work, so, just to really, make that clear a really good example of a negative cash flow cycle is a real estate agent a real estate agent, will run around and sell a house and they don't actually get paid in many cases until the property settles so, they will do all this work before. They get paid if, you have a positive cash flow cycle, you get paid before you do the work or you increase the, cash before goods, and services, are delivered anyway not to sidetrack it back, onto the story so this person does billing after, the month. Now. The. Obvious, client. That was get to be rocky and the work had changed, he noticed that they were starting to pay their bill late as well and starting. Not to pay things on time or starting to question things on the invoice and I, said well have you got cash, to float you through like if let's pretend this client leaves have, you got enough cash reserves to pay your team and invest, in some marketing so you can bring in some new clients and the.
Answer Was no, and. I. Couldn't help it and I said what. Happens, if these client leads how long can you keep the doors open well, how much time do you have to find another client, and I. Would. Have loved to have heard months, or would have loved to with heard something like three months six months something like that because that's a reasonable, amount of time to find a new coin or reassess, how you do things. But it was a few weeks and. In. The way that they operate from a negative cash flow cycle, even if they got a new client it would still be a bit of time before, they got paid and I'm like I'm. Sitting on the edge of this phone, call I'm like I'm really not like I started to feel anxious for, them I really, really did and at. This point because, things were already Rocky they weren't in a position where they could suddenly start saving more cash flow or hedging against it in any way so, now we've got three risks. We've got three really big inevitable. Wrists like would, you be sleeping at this point. No. Definitely not as. You say like it's it's a scary, one especially when you have that conversation you're, like hot when, you feel like. When you feel worried about you like or how they, sleep been considering, the high like it's not even my business and I'm already feeling worried about it, well. The further I get into business the, more I value, sleep at night factor I. Really. Really do like the ability to sleep, well at night he's just so valuable to me I don't want the stress of situations, like this but, the story gets better I. Said. To him I'm like dude you are really stressed and not sleeping can you take a day, off like, maybe take a couple of days off really. Think about what we've discussed here in these risks, and all the rest and like ever think about how you want to address things from these clients and he. Then said I can't. I'm. Like why. Not I'm lucky you know do you have the weekends off like what's going on you guys well everything, in the business needs, made a function, like if I have a couple of days off that means we effectively stopped and the team won't have things to do and I might so you're telling me like on top of all of what we've spoken about right now you have keyman risk like. You. Can't take some time off or taking, an ugly sources I'm like this is just no fun at all like this is this is the point where it's like I really started to feel for this person because to, a degree they had actually, been successful like, they've been running a business for a number of years that have been growing many, things going on but just very very, negligent. On the risk now. Unfortunately. This. Story is just way, way too common, way. Way too common and, be, still like this conversation on the phone actually like led me to the point where that's what inspired this podcast, episode because I'm hopeful, that someone, will actually listen, to this episode and. Relate to what I've just gone through there and hopefully, do something about it before this, moment kind of happens from there so, Kim what's. It been like for you dealing, with risk like is he something you've put some conscious effort into, well. Again I've kind of had the benefit, of like previous, jobs saying like again, I'm not someone who just started in an. Online business and did that like I've worked in accounting, firms, IT companies, grain trading companies, and all. Of them had versions, of this, risk built into us well so I was probably more. Beneficial, than some and being able to see this thing going well you know like we had to go and take out key man insurance and, all that sort of stuff and we had to assess all these risks and we had many. Similar ones as well and oh, you, as I said grain trading company would, be similar and the, whole business was built on risk because you put grain into. A 40-foot, sea container and then you send it off and when it hits the port you. Get paid so. You don't, pay the supplier, you haven't. Got the money there, and you put it out onto the ocean. Where. You know things can happen and you wait, to hook it to the other side for it to arrive spirals. Are a real thing let's be honest, there, has been my end because you think of all the big shipping lines like there is, legitimacy. Of parts there is legitimacy. Of like. Freak, waves there is legitimacy, of sending into a country, and, maybe. People too like we used to deal with people. In Vietnam but they were actually operating out, of China and then. If they try and take stuff across to China well, there's, a whole bunch of other risks there and I, remember hearing one story where what, happened was their, supplier, had the person who had been to come in I started the receiver who was meant to come and receive it disappeared.
From The face of the earth for a better year they. Were going. From Vietnam to China and they just disappeared with a shipment of like. I don't know like close. To a million dollars on the water. So. You want to talk about scary risk that is like. I've. Seen a big, big, ones like that where it's just like you literally go you, know I understand. My, old boss had a shaved head so, you couldn't you couldn't stop pulling all your hair yeah that's, the only way to alleviate what, an, education, but I think even the more obvious ones would be like currency risk because. You could literally lock, in a profit so. We had to we did two different things and it's a really good idea as well so like let's just say that you're dealing with, the, USA, in Australia and we and then we do that as well right however, we don't take we don't have probably as big of contracts, we would have two. Hundred thousand like fifty, to two hundred thousand, dollar contracts, go out so we had to take out a Forex contract, a, lot. Of suppliers like the actual people that we purchased from they would also do their own marketing overseas they wouldn't take out they wouldn't take out forest. Covers they would just kind of go well if it goes up we benefit if it goes down we, lose so we always had to lock as in so my everyday I had to look at the forest covers and go well. And you, could sometimes close them out it's like a little bit like we will maximum. In our books be allowed to close out like 10% so we would be able to bike basically, offset. Or gamble so we would take out a cover go, cool if it went up with our can we close us that will get paid out a profit and then, we take out a new cover at this rate and we're still profitable here so, there's a lot of juggling but we were one of the few that actually took out covers. When we had to deal with the forex teams but, a lot of other people they wouldn't and then they would go cool well you, know same even let's just say you did a website build and. You build someone $20,000 for a website in the US and you got paid at the end of the contract the. Currency could have dramatically, fluctuated. From what, you said was going to be worth it could be worth double, it could be worth half because. If you're translating, that back to your local currency but. Again it's something that probably I would guess a lot of people online would probably don't even think about don't even take into consideration, that that, again is another another. Risk for them it. Can make a massive difference in my business like obviously. Outsourcing, angel we have a lot of stuff in the Philippines we're dealing, with pesos, and like so, if that rate moves in, the. Philippines or in the US it dramatically, affects my business we. Do have currency risk and like how much profit we make given. You know can depend largely on what's happening in the markets so, you, know it's a really good one that I think especially a lot of Australian businesses with, the amount of us tools we buy all the subscriptions. You can notice you costs creep up dramatically, if the US dollar moves but. I want to ask you a question on that then why. Do you feel that most, business owners don't, take risks serious seriously, or deal, with risk yeah. I mean I think some, of the main ones I feel like sometimes people put on cash goggles which is where it's like you know you like to put your goggles on say ah but this client, is so good and we're just making all this money together and it's. Not convenient. Your, is it like, I. Say. Happy but it's not a good feeling to try and assess it because. In any situation, you always want to see you always want a positive outcome and if it's positive I always. Find that people go well like, they hit the old never has like I could. Never change these guys are always going to be awesome this is always gonna happen this way and.
It's Never going to change whereas like as you said because I've seen a lot of stuff and like, I see especially in w.a like so many companies that have had contracts, with mines that have shut down and things like that and just not got paid, like. It becomes really, really inherent. For me I'm like okay we always pay attention to these, like we have where these risk may lie and, I can't remember if it was week we talked about it or on one, of the earlier, podcast pretty psych where you kind of design. The divorce before the marriage, where. You go okay like forget, it we're gonna do this but if everything goes wrong because as well like I've just had, so many people come into me lately similar things or a couple of guys that are going into partnership together, I'm like cool have you designed the divorce and what do you mean I was like well what, happens in six month time if they're, not doing the work you're doing all the work or whatever it may be like what, happens in like, ah yeah. We haven't really thought about that I'm, like well in every, case just like as you said same was like lead generation or anything like that like. You need to design like if today, everything, got shut down like if you divorce, from this you, know this person, it's interaction whatever it may be what's. The outcome how do you kind of solve that and. If you don't do that well you know it's like you. Leave yourself literally. Up, a creek you, know we all know that Creek. Creek and there's no paddle to get back down absolutely. It's. Fascinating it's really fascinating for, me I feel like when, it comes to these topic. Risky's, not a fun topic it's, not fun to learn about it's, not fun to deal with just. Like accounting, just, like bookkeeping. So. It's like you know for a lot of business owners and, this is the big one it doesn't necessarily have an impact if you don't deal with it today, so. It's like it's not agian but. As well it's gonna say like you. Don't like, again there is no like, I have many books here there's. No like, here is your business book on all the business things you need to know as I said if I didn't have some what exposure to it previously, would. I be having that even in my scope of awareness would I even know that it's something that I need to consider maybe. Maybe, not like so you know I think as well as you say it's um it's it, has a level of unimportance, but as well probably a lot of level of unawareness, like, if you tell people that you team an insurance they're like, keep. Keep man what, is it what is that word like what does that mean wait, wait got a high one, I. Need key people formatting, they. Just see a lock in the sky and it's like a shining light there's, key man. Absolutely. Even. Let's. Be real it's like books or marketing, in sales and, business, strategy, and fast, growth they, do well, businesses. On the, unattractive. Side like, risk. You. Know I can't see you know cracking any Amazon bestsellers, unless, it most, risk becomes its own category, there may be I. Reckon. The picture of you sliding, in your underwear title risky business I feel like that would I feel like we've got a best-seller I'm co-promoter. I'm happy to go on that one if you put it as our mission but. It's. A really fascinating one, from there and it's, kind of like a falls into that category when I look at it and go what, needs to change we're. More small businesses will, you know really start taking this stuff seriously and, I think awareness is going to be the first step and that's what I'm hoping we will achieve on, this podcast. Yeah. And I think that's it's as you say it's so important, because, again. We've probably talked about probably, a lot of unsexy, things on here and. If. They may or may not have the most the most viewed episodes but at least we're putting it out there so people can because I know a lot of people go back and listen to the, episodes from when we start and like we we, literally, are like pulling back the curtain and going need to think about these things even if we don't get many listeners or views on that one particular who, knows this could be the best or the worst but at least we're telling people about it I kind. Of go further it's like if we help, one, person from.
This Episode worth, it absolutely. Worth it job, done all, right so what I want to do is I want in this episode go over the five, types of risk I see most commonly and the ones that I think a lot of people will relate to and need to start to be aware of so. I'm going to dig dig into them one by one so the first one we've already discussed a little bit is concentration. Risk and a. Really good example of this is when more than 25, percent of your revenue, comes. From a single source so if you know this client or person, was to go then. It's, a very very you know big deal and it impacts, the business in the sorry. Impacts, the business in a big way another. Reverse of this is the, supplier side of things so, if you've got one supplier, that supplies all the products. To your business so let's pretend. We're. A company that sells cups, and. We, get all our cups from one company if they go out of business we don't have any other way to get our product so, concentration, risk the. Second one I'm, going to go through is, absolution. Risk and. The best examples, of these it's very self-explanatory when, you use the example, is Kodak, or, blockbuster. So. When, new technologies, come around might be internet like, I dare say crypto, is going to be like, mobile phones have been or smartphones it's like if you refuse, to adapt to where technology. Is clearly. Overtaking. Or be stubborn about it then, you. Can, go out of business and like codex the best example, of this because there was such, a big company and actually invented, the digital camera but. Because they made such a fortune, selling chemicals, for film. Producing. It they didn't want to adapt, I'm sure someone, regrets that in a big way in the board but both to vote differently if they look back. The. Next one is key man risk so key. Men is when something, relies, on a single person in the business so if you as the business owner if you have to show up every day for work to happen you, are the key man risk in the business or, maybe you have a talent, or a hire on someone on your team and they're the only person that can do that job, so, to, reduce that one it's really interesting that I kind of look out and go like true person, to people have to be able to do everything in a business otherwise, it's a job it's not a business it's pretty, good on there the. Next one I wanna go into here is financial. Risk and, when. I say financial risk what I'm talking about is cash, reserves, so. I know it's, a really good saying from, book I recently read by. Keith, Cunningham and he kind of said is that you, know most, business owners are trying to make profit but, you can't actually pay, your bills with profit you can't actually you, know go and say would you take some profit like most places I go take cash, so. When, you kind of look at that in reflection, and go I hang on you, know cash. Is the thing that's really important, so having a good cash reserves, to get you through hard times or, to, hedge against if risk happens is just such a huge one for me. Cash. Solves problems I'll be real like you can get out of a lot of trouble with cash and. Then. The last one but certainly not the least one I want to go from here is platform, risk so. Say. I what I've seen many SAS companies, come and go over the years many Kim and I've, seen even, more change. The way they do business so. A really good example of these ones is like I'll, use Facebook as an example if your whole business relies on Facebook, you may not be concerned with Facebook going out of business but I think you should be very worried that they change the way they do business or, change features, like how many things that they change over the last few years it's just astronomical. A really good example of this if you're in the crypto space and your, business relied on Facebook, it's, like they put a band flat out on that category, and. Then they put it unbanned that's like you just don't have that control and the other one is Google. I'll. Also say that a lot of businesses run proprietary. Software's, and things within it might be for their bookkeeping it, might be a CMS, for their website but you know if that goes down it's like you know what's the real cost of exposure, and not being able to do that, Facebook. Might be your entire source, of lead generation at the moment I know that's not uncommon or Google might if that was to go like your front end of your business is just out of there.
So. That is the five types of risk, that I most commonly see and I, think we're even going to be a Chiqui here in Goa Kim this is the end of part 1 of this, episode, so, this is part 1 on risk, and we, will be back to you soon with, part, 2. You.