In an ideal world, you’d want a business to be high growth, low risk and consistently profitable. If you think you’ve figured out a surefire way to achieve that, please let us know - we’ve got some magic beans we’d like to sell you.
In the real world, there is a trade-off between those three conditions - risk, growth and profits. You can generally have one or two, but never all three, and balancing them is at the heart of your investment strategy.
If you aspire to rapid growth and high profits, you’ll need to figure out a way of living with the attendant risks.
For Andy Alderson, founder of £60m van rental business Vanarama, this means mastering the risk matrix, a simple device that allows you to map the risks facing your firm, determine how probable and severe they are, and then hedge accordingly.
"I’m very conscious that when you run a business there’s a responsibility to your employees. They are literally relying on you to put food on the table – so I don’t like to leave things to chance or wait for things to go wrong. I basically live in my risk matrix.
"I guess it’s a product of the early days of the business, when despite my best planning efforts, things did go wrong. I started our leasing business, primarily focussed on pickup truck leasing, in the summer of 2004 and all the early signs were good. We were growing quickly off the back of sustainable demand. Even during these early days, I had quite a detailed risk matrix.
"When things started looking a little uncertain around 2007, I’d mapped out five events that could have a significant impact on the business, with various probabilities. When Northern Rock collapsed, house prices crashed, fuel prices went up dramatically, credit dried up and my primary lender fell through, demand for pickup trucks halved, and the economy went into recession. All five of my high impact risk scenarios came through in a short period. I had to lay off two thirds of my staff. It was absolutely crushing.
"While that was an incredibly hard time, because I’d prepared my risk matrix, I was able to put strategies in place. I had already secured another lender and shifted my focus from pickup trucks to vans, so Vanarama was born.
"While we are much bigger now and perhaps better placed to ride through bumps, I still carry those memories with me and it’s a position I vow not to be in again.
"The automotive industry certainly hasn’t been immune to the effects of the current political and economic uncertainty. We’re now in the fortunate position of growing, despite the challenges.
"I’d say my risk matrix has been crucial to getting us to that position. I’m in it almost every day. I look at those events that can impact the business and assign them an impact and probability score. Anything in the high impact, high probably area is what I start strategising for.
"I’m looking at external and internal factors. For example: are we leaning too much on one revenue stream? What happens if this supplier doesn’t deliver? What happens if we don’t expand into a new area? What happens if there’s an election tomorrow? Really, I try and leave no stone unturned.
"That’s one of my biggest learnings over the years – don’t wait to start planning. Managing risk is an ongoing task, not once a month or a few times a year. It will set your business up for the long term, and fuel sustainable growth. If I see an opportunity, the first thing I do is run the numbers and look at the risk plan – I know both of these things inside and out.
"For me managing risk isn’t a negative process. I’m not walking around the office wringing my hands. For me it’s about building confidence and being sure I have all the bases covered. With that, we can go for growth, which is more exciting and infectious. It’s great seeing this positivity and quest for growth spread throughout the culture of the business. But all that starts with knowing there’s a plan for all eventualities."
Image credit: Vanarama