In any business, creating wealth across market cycles requires patience, fortitude and a will to navigate uncertainties. Here are some proven strategies for family businesses to lower risk and enhance the possibility of achieving their wealth creation goals.
Think ‘forever’
Business is a vehicle to create wealth. If one has to go from 10 to 1000, it is possible only in business. And it can indeed happen if risks to the business and cash flow are managed well.
Growth happens if there is a demand-supply gap. What will be the situation in your industry a few years down the line? A prudent way is to plan for the future in terms of three, five and ten-year blocks. If your business’ growth potential exists, you can build on your distribution and grow the business.
McDonalds India has been built on the above practices. They have built a plan to scale over a 10-year period using the franchising route, and are still expanding.
Build capabilities
Many businesses operate by impulse, and hence miss out on growth. However building capabilities and defining key parameters are critical for growth.
The term capacity building will vary according to the type of business. In a service business, service levels are critical. In a trading business, good principals are important, especially in international trade. In manufacturing, maintaining costs at a unit level is extremely critical.
Outsourcing is a popular strategy in manufacturing if capacity utilisation is low in the industry. This also frees up capital to grow the business.
Separate personal finances from business finances
It is very critical to separate personal and business finances, especially in high-risk businesses. It helps to maintain the promoters’ capability to invest in market cycles and expand the consumer base if needed. Without this separation, the situation could get out of hand.
Personal risks need to be addressed by entrepreneurs in a structured way. This can be via creation of trusts or through an investment company. This can reduce the risks if taxes have been paid.
This can also help in bad times to tide over the situation.
Master the magic of compounding
Many businesses would like to reduce debt capital or enhance their returns over a period of time. One way to do this is through compounding. Although it is referred to as the 8th wonder of the world, compounding is seldom understood by most people. If one looks at a 20-year period at a 14% CAGR, then the capital generated is fifteen times and if it is 20 percent, then it is forty-six times.
Many business owners don’t understand the power of compounding unless they are experienced investors or decision-makers. Having a simple conversation on growth rates with an expert can be used to challenge the limits in the business and build prudent and sustainable practices over a period of time.
The real opportunity is forever!