Are you a risk taker or are you risk averse?

By NZHJ Team December 12, 2016 Money Matters

Everyone is different when it comes to making financial management decisions.

This is particularly so in three areas:

  1. Margin management.
  2. Inventory purchasing.
  3. Selling on account.

Now I will be straight out with you, the reader: I have a risk averse mentality.

This may be the accountant coming out in me.

But some of my friends and clients are the opposite. They treat trading like a “bull” share market.

So what are the advantages and disadvantages of these two business attitudes?

 

THERE’S NO FALLBACK WHEN YOU’RE TAKING A RISK

Let’s look at the risk taker who’s seeking greater profitability.

They sell a large quantity of commodity products at a discount to an unknown debtor or current customer who has had little to do with you or the store in the past.

No credit checks were completed to verify the customer’s ability to pay. In fact the store celebrated gaining a customer from the opposition.

Always ask yourself: “Why are they doing business with me this season?”.

I suggest they are not looking for new friends...

And always remember how much more you have to sell to recoup the Gross Profit you’ve lost on this “great” deal.

For the risk taker it is about taking a “punt”, giving it a go.

But, to get a great price and corner the market they may well have to buy a whole year’s stockholding in one transaction.

That’s great if the price goes up in the future, but it’ll turn into a straight loss from the bottom line if the cost price drops.

Greed can overrule logic!

Then there’s the question of the effect of an unproven new customer on your debtors ledger.

Risk takers will take on anyone, maybe even customers that no other store wants to deal with, because they don’t want to lose the sale.

So, when does risk taking work? The answer is: when all the stars align…

But, when it goes wrong, there are no stars in that sky – it is pitch black.

 

IS BEING RISK AVERSE A CONSERVATIVE PATH TO PROFITS?

Let’s turn 180 degrees now and review the attributes of the “risk averse” manager.

Being risk averse denotes conservatism. The object here is not necessarily growth for growth’s sake and involves a different method of profit generation.

Through prudent management, margins are maintained and through price management margins can be increased.

Margins can also be increased by improving merchandising and training to achieve more add-on sales.

The “risk averse” manager’s inventory purchasing is conservative and is not transacted on a once a year basis.

That is, inventory buying is “hedged” and the cost price reflects the market value at today’s date.

Whilst this approach will not definitely bring you a profit increase, on the other hand it should not lead to a substantial loss.

I have always said that 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 at least 6% of the debtor’s ledger, no greater, in dollar terms.

A risk averse manager would have a credit policy and processes for credit checking, timely collection procedures and account reviews.

 

SO – RISK TAKER, OR AVERSE?

In summary you can fluke it as risk taker and make great profits.

But that will be in most cases just short term gain, with the potential for long term pain or – even worse – financial oblivion.

Your chances for survival are much greater by being risk averse, sensible and rational in your decision making.

Over to you to work out which path you should pursue!


 

Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au

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