Preparing for Worst-Case Scenarios
Life can be unpredictable, so having a plan for personal and business endeavors is critical. When starting a business or new venture, knowing when to push forward and when to throw in the towel, developing a sound business strategy that includes contingencies for potential challenges, and being prepared for worst-case scenarios can save money and time and alleviate stress.
Growing up, I was taught the importance of being a prepper; my father called us “the storing up a bunch.” Living in a hurricane-prone country meant we had to be prepared to survive without access to stores or resources for up to a week. This instilled in me the value of preparedness, which has translated into my business approach. And just like life, sales can be unpredictable, with busy and slow seasons. To be ready for any eventuality, it’s crucial to have a savings fund set aside for financial emergencies, with three to six months’ worth of income available in liquid form. Although we’re all advised to do this, many fail to follow the same advice when it comes to their businesses.
Prepare Economically
Financial planners advise that planning three to six months’ worth of savings is ideal, especially in business. That means keeping a separate business account with three to six months in savings and a personal account with the same. Sure, without some risk, there is no gain, and it may work out, but the odds would be too great if it didn’t. Having that failsafe will keep you prepared for any outcome. It’s essential not to take unnecessary risks that could jeopardize your family’s well-being. I disagree with financial gurus who suggest getting business loans against your family home, as this could lead to many problems, including divorce. Taking such a risk might be feasible if you’re single and have nothing to lose, but protecting your family’s financial stability should always be a top priority, and it’s better to be safe than sorry.
Worst-Case Scenarios
To keep your business afloat, it’s crucial to have three to six months’ worth of capital on hand to tackle various challenges that may arise. Here are a few examples:
Firstly, if your business experiences a downturn or the market suddenly drops, you may not be able to generate the same level of revenue that you’re used to. This can quickly deplete your cash reserves, and if you don’t have enough capital to sustain your business, you may have to close down. If the last few years have taught us anything, it’s to always be prepared for the unexpected.
Secondly, losing a business partner or stakeholder due to a job change, health issues, or, in the worst-case scenario, death could significantly impact your business. An insurance policy for partners and managers will help. Suppose the primary person working on the project is absent, sick, or needs extended time out of the office. Identify suitable backups who know the project’s details and progress at least weekly. That way, there will be minimal disruption in that case, and the project can continue without hiccups.
Loss of a significant client or customer making up more than fifty percent of the business revenue. Never let one client relationship or customer account for over 25% of your business revenue. Make sure to keep adding more customers to average your income. I have experience with this; I’m a subagent, and in 2018, I made the mistake of relying too heavily on one client for all my business revenue. When that client unexpectedly stopped paying, my income dropped to just five percent. It took me a year to sort it out and another year to receive the back payments. Since then, I’ve learned the importance of diversifying by utilizing different client relationships for my customer base. That way, I mitigate the risk of losing significant revenue.
Now, I work hard to maintain relationships with different clients while selling their services to more customers, building multiple revenue streams to ensure that no single customer or client makes up more than 25% of my income. Though finding and retaining new customers requires effort, taking these steps now will save me and my business from potential headaches in the future.
Unexpected Costs
Unexpected costs can pose a significant challenge to a business, particularly when plans change and require a larger than anticipated expenditure or a longer completion time. This can be especially problematic in areas like real estate or technology implementation, where construction must be completed before billing can begin. If a delay in construction results in an extended period of inactivity for the construction company, this can have severe short- and long-term consequences, particularly if the completed project is a significant source of revenue for the company.
In his book “7 Years to 100 Million,” entrepreneur Nathan Latka shares his personal stories and the lessons he learned from his successes and failures. One poignant story recounts how his grandfather lost everything by pouring money into a failing apartment construction project. Despite significant issues with the property, his grandfather persisted in the construction, resulting in higher and higher expenses until the business ultimately failed.
Know When to Make A Change
My father spent thirty years struggling with an unprofitable business. He relocated from the U.S. to Belize in the 1980s to make a fortune in organic fertilizer but encountered countless obstacles instead. Despite obvious signs of failure, he persisted and refused to give up. Sadly, he passed away as the only one of his five siblings who did not achieve millionaire status. I wrote You’ve Got to Know When to Hold ’em When to Fold ’em because I learned from his mistake and took those lessons to heart.
When creating your business plan or organizing your project plan, you must take a step back and gain some perspective. Take a mental inventory of what’s going on, the risks, the worst-case scenarios, and how you will deal with them when they arise. If you know what might come and put an extra budget aside for the unexpected, then you will find you can deal with the uncertainties. You can stay in business and have an advantage over your competition.
Entrepreneur Keith J. Cunningham’s book, “The Road Less Stupid: Advice from the Chairman of the Board,” provides further insight into avoiding common mistakes that can lead to costly and devastating consequences. Learning from others’ mistakes can help entrepreneurs make better decisions and be better prepared for the next opportunity.
In conclusion, learning from the mistakes of others and being prepared for unexpected challenges is crucial for success in business and life. While we may make our own mistakes along the way, it’s important not to get discouraged and instead use them as opportunities for growth and improvement. With each setback, we can learn and become better equipped to take advantage of the next opportunity that comes our way. So, let’s keep pushing forward and striving for success, armed with the knowledge and lessons learned from those who have gone before us. The quicker we can get back up, the faster we can take advantage of the next opportunity.
Read about business plans, How to Business Plan Profit and Loss, Business Plan is a Life Plan, and How to Write a Business Plan Step by Step. Subscribe for more business, sales, and investing posts. Have a lovely day.
