An outsider might think that entrepreneurs take chances. That’s simply not true. They take risks – and there’s a profound difference.
You’re taking chances if you act on the assumption that everything will go your way, if you rely on variables that are outside your control, if you do not understand the fundamentals of the market you are about to enter and if you cannot measure your actions.
On the other hand, you are taking calculated risks if you perform reasonable due diligence before executing, you seek input from trusted advisors, you rely on experience – not luck – and if you can measure results against your plan.
The savviest entrepreneurs prepare for all possible outcomes. They anticipate what can go wrong, and they prepare for it. When the unforeseen happens, they adjust quickly.
Each entrepreneur’s challenges are unique. That said, I have had the most success managing risk by infusing an intense focus on process into my business. I can trace most of my company’s failures (and my own) to deviation from process. Often, this is caused by lack of focus.
Here are a few things I’ve learned along the way to create a process-driven company that enables me to take risk with clarity.
1. Forget about the complicated handbook
Instead, let your team write the processes. Have your subject matter experts define best practices to execute successfully and mitigate risk. Keep it simple. Use checklists to supplement your process manuals. A one-page checklist beats 1 000 convoluted pages of process.
2. Do not become upset automatically when people fail to follow the process
Ask whether the process was understood and properly communicated. Have we considered that the average American reads at a junior high school level? Yet many of our handbooks are written at a much higher level. People can be accountable only for what they understand. As our teams perform with greater understanding of process, the risk of execution-related failures drops dramatically.
3. Update your processes regularly
What makes sense today may not make sense tomorrow. In an environment of continuous learning, our processes are always evolving. Think of your process book as the place to institutionalise memory. As stated above, the unforeseen will happen. It’s a matter of when, not if. The first time the event occurs, it is unforeseen, and you address it. If the same event happens again, then it is a process, management or employee failure. Ensure that your new hire integration plan allows plenty of time for process absorption.
When problems arise, it’s tempting to ignore the small deviations and errors. If you have enough small deviations, it will build to a major failure. To manage risk, it’s important to dismiss paying attention only to severe issues. Whether a failure created a minor problem or a large one is purely a matter of chance.
I have managed risk in my business by treating all process failures the same. By discovering the root cause quickly, we can understand what happened and develop measures to improve execution on our plan.
When your plan is challenged, here are a few questions you should ask and steps to take to better manage risk:
- Describe the incident. What happened? How often has it happened?
- Investigate the incident. Assign cross-functional teams to investigate. Ensure the team produces documentation to support its findings. This may require meetings with people inside and outside the company. Outside perspectives are often helpful. If we are involved directly with a situation long enough, we can easily develop blind spots. Outsiders will not have the same blind spots.
- Investigate the process. What process was supposed to be followed? Was it followed? If not, specify where the process was not followed and why. As stated above, was the process properly communicated and understood?
- Define solutions based on the investigation. Ensure the solutions are both practical and highly tailored to the issue. Once the solution is defined, what is the plan for implementation and measurement of success?
- Communicate liberally. Too many companies share their successes and bury the failures. It’s critical to communicate what went wrong and the solution with all parties involved. This is how you institutionalize knowledge.
- Document and review. Document the resolution in your process manual, and review at defined intervals to confirm the resolution has taken hold and that no course corrections are needed.
Related: Evaluating Risk in your Business
These simple steps will help you build better processes and a culture of continuous improvement. In the end, there’s no better way to mitigate risk.
Entrepreneurs distinguish themselves by being able to manage risks in the face of uncertainty. There is an undeniable element of intuition and luck inherent in their decisions. When faced with these variables, most people will freeze. They will be afraid to take a risk, because they cannot distinguish it from chance. In contrast, an entrepreneur understands the variables and addresses those that he or she can control in a process-driven environment. The bases are not always all covered, but the known variables are controlled.
This article was originally posted here on Entrepreneur.com.
What’s Your Number? How To Unpack Company Valuations
Business is booming. Investors want in. But how do you put a price on the value of the company you have built with your own hands?
Company valuations is such a hazy part of the scale-up journey of a private company. Putting a price tag on a business is both art and science. At the end of the day, the number that makes the headlines (if ever disclosed) will be where willing buyer and willing seller meet.
But how do you , as business owner, go about setting your asking price? Before approaching investors, it’s a good exercise to determine your own valuation range for the business. Choosing the right valuation method is the first big question. The answer has many parts to it, but the most important driver is the stage of the business.
Let’s look at some of the most commonly accepted valuation methods in our market:
Applicable stage: Established, profitable companies
Listed companies, institutional players and private equity investors normally invest in a company for its cash flow profit that can contribute to their portfolio income. More often than not, companies will be valued based on their current earnings (bottom line profit after tax).
This method can only be used for companies that consistently make a profit. A multiplier will be chosen based on the company’s perceived risk. Younger, more risky businesses will likely have lower multipliers (as low as 3 and 4) and high growth, well established, lower risk companies will get higher multipliers (8-15).
Sometimes small adjustments are made to current year earnings (like non-standard, non-repeating income statement items) after which the valuation is set at Earnings times multiplier equals company valuation.
Discounted Cash Flow (DCF)
Applicable stage: Post-revenue start-ups, growth companies and established businesses
The most commonly used method in practice, the DCF method argues that a company’s value is determined by the future cash flows that it will yield to investors.
The starting point is creating a five to ten year cash flow forecast for the business. This is no small feat. In order to create a full financial model – income statement, balance sheet and cash flow statement – for the next decade requires a lot of work, both from a strategic and technical perspective.
Investors love this model because if forces the owners to put a clear strategy and expansion plan for their business into numbers. It will include dozens if not hundreds of assumptions – all of which can be scrutinised for reasonability. The result of financial model will be five to ten years’ worth of projected cash flows. These amounts are then discounted to present value at a discount rate that reflects the company’s risk and expected cost of capital.
The sum of the discounted future cash flows plus a terminal value (that represents the value after the five or ten year period of the model) then represents the valuation of the company after some final small adjustments for things like existing debt in the business.
A revenue multiple valuation approach is focused on the market for similar businesses and is underpinned by your company’s current turnover. It seeks out the sales price of other similar companies in the country or worldwide, adjusted for size, stage and market differences.
A company that sold for R100 million at a turnover of R50 million would have a two times revenue multiple (valuation/revenue). If the average revenue multiple for similar companies is in a certain range, this multiple is then slightly adjusted and applied to your business.
If the average sale in your industry has been two times revenue but you are growing much faster than the average with a better competitive advantage, you can argue that two and a half times revenue is a more applicable number for your business. Revenue multiples are often used as a reasonability check in the market for the current asking price.
Most established companies are valued using one or a combination of more than one of the above three methods. At start-up stage, there are a number of other methods like Cost to Replicate or the Scorecard Method that early stage investors look to. When a company is simply in too early stage to practically value it, seed stage investors would also consider SAFE Agreements (Simple Agreement for Future Equity) – an instrument that determines that the percentage of the company the investors are buying with their investment. This is only determined when the Series A round is raised at a future date and under certain conditions, generally at a discount to the price the series A investors are paying.
Company valuations are complex. Many of the above technical factors play a role. A lot of it also comes down to the salesmanship of the owners and the negotiating capabilities of the parties. In ‘How Yoco Successfully Secured Capital And The Importance Of A Pitch’, the Yoco team speak about the importance of the right approach in their recent R248 million fundraising
Don’t go into this process without seeking some kind of expert advice. The price of the wrong valuation is simply too high. Make your numbers and your arguments bulletproof and you will be on your way to defending a strong and exciting valuation for your next raise!
3 Keys To A Vision Others Can Own
Trying to get others to buy into a vision that is all about you getting more money is not going to excite people.
I get really excited about my dreams. Over the years, as I have led my team, I have realised that they aren’t as excited about my dreams as I am. I own two restaurants and employ minimum wage employees. In the early years of owning my restaurants, turnover killed me. I used to fight for them to have the same passion for my goals and dreams as I had and as a result I had extremely high turnover. Confused and frustrated, I knew I needed to change the way I was leading a team.
A few little changes have created a committed team and extremely low turnover. If you don’t have a passionate, committed long-term team, check these simple vision casting strategies.
Often our vision that we cast is shallow and self-serving. A vision that is all about you getting more money is not going to excite people. Take some time to uncover what you are trying to accomplish. When you can cast a vision beyond your selfish desires, others can sink their teeth into the vision. For my company, I wanted to raise up leaders to change the community.
My focus changed to my crew and they could feel the shift in perspective, which also helped me to earn a bi-product of more money, my original desire.
Our deeper vision helps us keep and build a team, but it’s still our vision. We need to really understand the goals and dreams of our team to find untapped potential and loyalty. No one will ever care as much about our vision as us because it’s ours. The more focused you get about helping your team and their wants and desires, the more they will care about yours. In my restaurant I had a young lady who wanted to be a teacher. I thought about what it takes to be a great teacher and how I could help her toward that. Find out what they care about and dig deeper to see what is behind that desire.
Marry the Two
If you have a team running around caring only about their vision they may be loyal and passionate, however, they will not be united in one direction. Magic happens when we combine our vision and their vision. At the points of intersection, our interests and theirs are united to accomplish more. I want to encourage leaders who can change the community.
As for the employee I mentioned above who desired to be a teacher, I trained her toward being a better teacher so that she could raise up young leaders to change the community. Now she is one of my top supervisors and teaches many other crew members. She will be an awesome teacher someday, but in the meantime, she is a valuable team member.
Caring for a team and helping them see how your vision and their vision can help each other will change everything. Growing people is the business no matter what business we are in. Care for others and they will care for you. Care only for your own wants and you will never get the most out of your team. Find a deeper vision, figure out your teams’ vision, and combine the two and your business will transform.
This article was originally posted here on Entrepreneur.com.
3 Signs You Are Your Own Worst Business Enemy
It’s hard to be objective about ourselves but if we really pay attention our colleagues will reflect how we are perceived and what it means for the business.
Sometimes, it’s hard to get out of your own way.
Entrepreneurs and business owners have to keep all the trains running on time, as well as figure out the next place they’d like those trains to go, metaphorically speaking. It’s a huge, complex job. So it shouldn’t be a surprise to realise that in many cases, the problem behind an underperforming company is the boss.
How do you know when it really is “just you,” though? We human beings have a notoriously difficult time being objective about our own behaviour and choices.
So, try looking for the following signs in the people and circumstances around you.
1. Your employees seem unusually tense or flat lately
Has the camaraderie vanished? Is the workplace one big collection of really bad moods, most of the time?
Of course, the boss’s mood can infect the entire office. As the leader of your team, you set the example and the atmosphere, and your employees follow your lead.
Getting along with others, both inside and outside your company, is imperative for success. If your employees and customers sense a negative change, then it’s worth examining your behaviour. These signs could be symptoms that you’re becoming a toxic boss.
To address this, first make sure you’re acting with integrity and in accordance with your personal values. Next, make an effort to demonstrate empathy with your employees. You don’t have to agree with every single point they make to do this. Respect their boundaries and try to see the issue from their perspective.
Finally, make sure you listen deeply. Employers who simply command and demand compliance find themselves stuck with the “toxic” label all too quickly. Instead, be curious about your employees’ perspectives and problems. Ask open-ended questions to get them to tell you more, and listen to what they say.
2. You feel deeply frustrated with your employees
Are you feeling unusually impatient around new workers? Do you find yourself snapping at experienced workers over small annoyances or accidents?
If so, there could be some deeper issues at play.
Insisting on perfection, or even just on competence in an unreasonable amount of time can eventually sour your entire workforce and drive away valuable employees. You’ll have a hard time attracting and retaining talent if you create an awkward, uncomfortable or outright hostile environment.
Instead, try practicing a “talk-down” method on yourself. When you feel your impatience or annoyance growing, mentally talk yourself down from these emotions to a state of greater calm. Here are some questions to ask yourself:
- On a scale of one to 100, how bad is this, really?
- What’s the worst that can happen here, realistically speaking?
- If that happened, how would we respond?
- Is this more important than my relationship with my employees? Or my reputation?
In most cases, reflecting on these questions helps you keep small issues in check. You’ll also want to give some thought, however, to whether there’s a bigger issue just beneath the surface. Using smaller problems as a diversion from the bigger ones provides an effective distraction from tackling life’s larger challenges, but doesn’t do much to help us solve underlying issues.
3. Minor projects are infinitely refined and “perfected” but your company hasn’t come up with a strong new idea in ages
One of the most common ways entrepreneurs become their own worst enemies is by focusing too heavily on things that don’t deserve so much attention. For whatever reason – be it fear of failure, fear of success, or something else altogether – people fall into the habit of spending too much time perfecting existing projects when they should be thinking about what’s next.
Not giving yourself enough time to create and innovate is one of the biggest ways to become your own worst business enemy. Your primary job as the business owner is to create that overarching vision for your company, and then work with your team to figure out how to achieve that vision. If you’re not even allowing yourself the time to do so, you’re fighting an uphill battle without reinforcements. After all, no one else can really do this kind of work for you.
To combat this tendency, try keeping a log of your time for two weeks. Track your time in fifteen minute increments to help figure out where you’re spending the majority of your attention and energy. Then carve out uninterrupted “CEO time,” and schedule it as if it’s a firm appointment you cannot reschedule or miss. Give yourself at least three hours a week to work on new ideas for your company.
It’s hard to be objective about our own behaviour and surroundings. Instead, use your colleagues, employees, and environment as a mirror to reflect back to you the reality of how you are perceived and the ways that perception is impacting your business. Then take the appropriate action to mitigate those challenges.
This article was originally posted here on Entrepreneur.com.
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