Public market companies had 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 or your credit line at the bank, and depending on how it
goes, might even affect 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 within a relatively stable market.
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.” No thanks - Pass!
Owners Have a
Bias Against Risk?
By Jacoline Loewen, EMDA Director, Director of Crosbie & Company Inc.