How much of a risk-taker are you when it comes to your pest management business?
Everyone is different when it comes to making financial management decisions. Are you a risk taker or do you take a more conservative risk averse approach?
In business, your financial behaviour tends to become apparent in three areas: margin management, inventory purchasing and selling on account. To put my cards on the table, I’ll admit to having a risk-averse mentality, maybe this is the accountant coming out in me. However, some of my friends and clients are the opposite. They treat business like trading on a ‘bull’ share market. So what are the advantages and disadvantages of these two business attitudes?
Typically a risk taker is more flexible in their margin management, being far more prepared to cut prices to get new customers or a big contract. Whereas this can be great for sales, you do have to sell significantly more services to generate the same gross profit. Even assuming the deal has been constructed to deliver increased profit, does it offset the risk of picking up a new customer who has no credit history with you? Always ask why a big new customer is interested to do business with you and do the necessary credit checks.
For the risk-averse manager, the object is not necessarily growth for growth sake and this leads to a different method of profit generation. Through prudent management, margins are maintained and through price management, margins can be increased. Trading margins can also be increased through better add-on sales.
For the risk taking manager it is the ‘punt’ – let’s give it a go and to get a great buy price and corner the market. We may well buy a whole years stockholding in one transaction. Great if the price goes up in the future, straight loss onto the bottom line if the cost price drops.
Greed can take over logic! And any benefits have a habit of finding their way to the customer rather than staying with the business.
Inventory purchasing is conservative and is not transacted on a once-a-year basis. Inventory buying is hedged and the cost price reflects the market value at today’s date. Whilst it will not give you a potential profit increase, conversely it should not lead to a substantial loss.
Selling on account
Risk takers will take on anyone as a customer – even the customer that no other pest company wants to deal with. Not only this, but the sky is the limit, the more sales the better and the less credit checks the better, don’t want to lose the sale. Great if you strike it lucky, not so good when you are left chasing significant bad debts.
The greatest potential problem with a business, which has a component of sales on account, is hidden in the debtor’s ledger. A prudent manager would aim to have no more than 6% of the debtor’s ledger (in dollar terms) more than 60 days outstanding. A risk-averse manager would have a credit policy, credit checking, timely collection procedures and review accounts.
So when does risk taking work? When all the stars align. When it goes wrong, there are no stars in the sky. It is pitch black.
In summary, you might fluke it as risk taker and make some great profits, but that is all it is in most cases – a fluke, that gives you short term gain. If it doesn’t work out, you’re looking at potential long term pain or, even worse, financial oblivion.
Your chances for survival are much greater by being risk averse and sensible and rationale in decision making. No prizes for guessing which path I recommend!
Peter Cox, Peter M Cox & Associates