The Most Important Thing every Business Owner Must DO
I met an interesting group of business owners last month (40 days back precisely) and a couple of them said these lines “We don’t believe in the stock market. We invest in our own business. My business delivers a higher return. I can control the outcomes in my business.” Some of these lines were so naïve but were loaded with overconfidence.
This is not the first time I was hearing them, and you would have come across someone with such thoughts. Most business owners some fashionably called as entrepreneurs (or even Techpreneurs) are self-made people who have a lot of belief in what they do. Business is based on confidence and you will find most business owners to be very confident. When I hear the lines above, I ask a few questions:
- Can you guarantee me that your business will continue to do the way it is for the next 10 years?
- Can you guarantee that all the RISKS that your business faces will
comfortably be managed?
- Are you aware of all the RISKS that your business faces?
I don’t see a lot of confident answers to these questions.
No one can guarantee what will happen tomorrow or this very moment. So “Investing outside of your business is not about returns. It is also not about how smart you are. It is first about Risk Management. It is first about protecting what you have and growing that in a meaningful manner.” Let me elaborate a bit on this.
Every business today faces many risks. Additionally, the pace at which these risks hit you knock even the best and largest of businesses (Think Nokia, Blackberry, Kodak, Thomas Cook globally. Even locally you will find hundreds of names such as Vodafone Idea, Talwalkars, Cox & Kings, Yes Bank and many others).
In short, something or the other is always coming for us and our backside (whether it is Regulation, Technology, Changes in Consumer Preferences, Competition, and many others…. Had anyone factored the Coronavirus impact?).
Take a look at the above and you will realize that the world is changing very rapidly. The average lifespan of businesses is going down and down because of all the risks that we face.
Thus, it is always a prudent strategy to separate business finance and personal finance. It is extremely important for a business owner to have personal investments beyond his business. This strategy is called as Diversification (a very simple one – Don’t put all your eggs in one basket).
You diversify to manage Risks and to protect you and your family from going back to the initial struggles you had when you started this business. You diversify because most private businesses beyond many of the risks that I shared also have 1 additional Risk – Liquidity Risk. I know of so many Asset Rich, Income Poor business owners that they have assets of Rs. 100 Crore yet can’t cut out a cheque of Rs. 1 Crore. Your business will be a significant part of your net-worth, but it is illiquid and so is Real Estate (another huge part of business owner’s investments). Liquidity is the other main reason you should have a separate portfolio that will come in handy for all your personal needs whether sending your child to Wharton, taking vacations and most importantly maintaining your current lifestyle.
Protecting current Lifestyle is one of your key goals and you should not allow the risks that your business is exposed to – to impact your lifestyle. You love your business and are dependent on your business for your income and Future Wealth but do not Expose your and your family’s Future by being naive and Overconfident.
When I shared all these points and made these confident business owners think, all of them agreed that they would separate business finance and personal finance & not let their business risks impact their personal lifestyle and their family.
P.S. At the point of this conversation with business owners, no one had factored the Coronavirus Risk (Black Swan event – unknowable and unpredictable) and the impact it would have on their businesses. Yes, the stock markets have corrected too but a diversified portfolio with Liquidity is what will survive and do far better than a portfolio with everything in your business…. Remember Investing for business owners is all about managing Risk and not just Performance…