Reaction or Pre-Action? We all tend to be more reactive than we should. What does it mean to be reactive? It means we wait for something to “happen” and then we “react” to it. If we take that approach we often feel like we are at the mercy of things outside of our control and two things are often true. First we do not have much input on what “happens”, and second, we do not have a plan for how to deal with the event, so we are forced to react. Not planning means being reactive, since we really don’t have other alternatives and sometimes by then it is too late.
The Difference a Plan Can Make. Planning ahead can make a big difference. Planning involves trying to shape events to reach a certain outcome. By planning ahead, we have thought out possible combinations of events and we have developed a strategy to deal with them. But there is an even bigger benefit to this preplanning. By anticipating possible events that might affect us, we often see weaknesses in our approach or structure and once identified we often can take corrective action to eliminate a risk before it ever affects us.
The Risk Audit – What’s In Your Wallet? For example, as a first step in business planning, I often suggest a risk audit. A risk audit is a process that involves evaluating 7 key areas of potential business risk to determine exposure and possible corrective action. Once identified, planning then allows the business owner to align business risk with the owner’s risk tolerance and to develop corrective actions to eliminate or reduce that risk. Risk will never be completely eliminated, but it can be managed and some risk is rather easy to plan around, but that often requires attention and taking action. It does not usually occur in a reactive environment.
An Example. Let’s look at an example. Say we have a business called Busco. Our review determines that Busco has 15 medium size trucks on the road everyday making deliveries – a potential risk. Now we evaluate possible scenarios, one of which involves one of Busco’s drivers being negligent, getting in an accident and seriously injuring a young high income professional with small children. The lifetime earning potential of such a person is quite significant and that is what the negligence of Busco’s driver caused. We need only to look at recent jury awards to see that the damages could be in excess of $8 to $10 Million. What would such a damage award do to the Busco business? If Busco is only carrying $1 Million in auto liability insurance, then it is quite possible that the injured party might go after Busco to collect the balance of the judgment. Could Busco afford to pay $7 to $9 Million out of its assets or cash flow? Would that put Busco out of business?
Just by identifying this possible problem, we can take action to reduce the risk or reduce the potential impact of this risk on the business. We could implement a driver safety program, more carefully screen and test drivers, buy more auto insurance or adjust and tier insurance policies, increase deductibles or self-insured retentions all to reach an acceptable premium and exposure level. We could also restructure our business to compartmentalize the risk, remove valuable property from the business, or take a number of other actions. The point is that we can take charge of this risk through planning and we can take actions to reduce the risk. If we do nothing and trust in luck to protect us, we have given up our ability to shape the risk and if it hits we will have no choice but to be reactive – that is really very little choice at all.
Planning and Taking Action. “Planning” is a proactive process and allows us to evaluate “actions” we can take to reduce the risk. A company that plans has far more possibilities and opportunities than one that does not plan. Planning makes the company stronger and better able to weather all kinds of events. The preplanning by the New York Board of Trade (see last blog post), most probably saved that business from extinction when the World Trade Towers were destroyed. In such a difficult business environment it is no wonder that businesses are turning back to planning.
The question for every business owner should be “Do you want to be lucky and hope nothing bad ever happens or do you want to take charge and plan your future? “