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August 29, 2012

Do Business Owners have a Bias Against Risk?

Public market companies have their knuckles rapped by Mark Carney for sitting on their excess cash and not putting it at risk in order to grow their businesses. An MBA finance class would agree-- that unused capital indicates a lazy balance sheet.
But does this apply to private companies too? 
Do they need to risk their capital too? 

Risk and the Private Business

Here’s a quick test for you. Put yourself in the shoes of an owner of a business and assess your appetite for risk.
Let’s say you are the owner of a medical device company and your management team comes to you and wants to launch a new product. Your team has done the analysis and it would cost $5M to bring to market, and the expected returns would be significantly greater. As the owner, you know that $5M will come directly from your own pocket, your credit line at the bank and the amount of money you can take out of the business for retirement.
The other option is to carry on with the normal business, which is going at a slight growth rate with the market stable enough.
Here is how you, as the owner, might weigh the risks: “Right now, I’m profitable. If all goes well, the new product will grow my $10M company to $30M, with a cash flow of $1M. If it does not go well, I’m in the hole for $5M and it will take me five years to break even and get back to where I am now.”

Jacoline Loewen   See Jacoline on BNN, The Pitch  Author of Money Magnet Director, Crosbie Co.
Crosbie & Co.
150 King Street West
Toronto, ON
M5H 1J9
416 362 7726
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