If you’re humming the Electric Slide right now (fun fact the song is called “Electric Boogie” by Marcia Griffiths), then I’ve done my job. Good luck getting it out of your head today.
The word axiomatic (one of my favorites) means “self-evident or unquestionable.” As I write this article, the S&P 500 is down ~25% YTD, interest rates are rising, and both NFL teams in Ohio can’t seem to win games that should be easy.1 You may call this “unpredicted times” but if we study history, what is happening today shouldn’t be surprising at all, in fact, it’s axiomatic. Markets go up and markets go down, bear markets turn to bulls and bulls to bears, inflation has been higher in years past and has been much lower than it is today, and the Cleveland Browns break my heart every weekend.
We spend our days at RKCA working with and inside businesses in the lower middle market, where, often times, the macroeconomic forces taking place are magnified. It’s my opinion that one of the hardest parts of running a business during a time like this one is how you throttle your “Risk Awareness Meter.” For the sake of efficiently, we’ll call this a business owner’s RAM. The funny thing about your RAM is that, if you’re managing your business during a time like this one right, it should be moving up and down. What it should not be doing is staying constant at one extreme or the other.
- If you’re RAM is on the high end, everything happening in your business and the world around it is a fire drill. It’s my opinion that if you have a high RAM right now in 2022, you’ve probably had one for a long time. If every morning you’re reading a headline and then running around mad inside the office trying to adjust your business to what is happening in the world, it will be hard for you to succeed. Years ago, I had a business partner who, at the drop of a hat, would come into the office with a new “pivot” for our business seemingly every time there was a new sexy headline in our space. I had a wise attorney and mentor tell me, after venting my frustration, “the business graveyard is littered with people who couldn’t get out of their own way.” Not everything is a fire drill and not everything new is the right way to pivot and go.
- If you have low RAM, first, tell me how. I’d selfishly like to know your strategy for when it’s 6:30pm at my house, three different kids are screaming or crying and my wife and I are arguing over who forgot to unload the dishwasher that morning. But if you do have Low RAM and are a business owner, this is not ideal either. While not every signal or flag in your business needs an immediate reaction, some do. Morgan Housel wrote about a Low RAM example in his most recent blog post:
- When the Black Death plague entered England in 1348, the Scots laughed at their good fortune. With the English crippled by disease, now was a perfect time for Scotland to stage an attack on its neighbor. The Scots huddled together thousands of troops in preparation for battle. Which, of course, is the worst possible move during a pandemic. “Before they could move, the savage mortality fell upon them too, scattering some in death and the rest in panic,” historian Barbara Tuchman writes in her book A Distant Mirror. There’s a powerful urge to think risk is something that happens to other people. Other people get unlucky, other people make dumb decisions, other people get swayed by the seduction of greed and fear. But you? Me? No, never us. False confidence makes the eventual reality all the more shocking. Some are more susceptible to risk than others, but no one is exempt from being humbled.2
- Fluctuating RAM
- Ahh…the Goldilocks Zone. In “unprecedented times” like we are in, this is where you want to be as a business owner. We work with a lot of business owners in this statis, and it’s hard to maintain. One key we have found to keep in this Goldilocks’ Zone is the implementation of KPI Scoreboards, something we use leveraging our EOS toolkit. If you have exposure to large publicly traded customers and your Scorecard is monitoring their stock price for example, you can keep an eye on this risk trigger vs. seeing a headline one morning and reacting. The same is true of price inflation, exposure to oil or gas, housing market, you name it. Getting the foundation right and identifying what KPIs you want to track is the easy part, the hard part is having the courage of your convictions to watch those KPIs each week and know when and how to react. That is where a good banker and advisor can help.
If you’re interested in learning about our Scorecard for business owners, email me. If you’re interested in a tutorial of how to do the Electric Boogie, click here.
- As of 1:00pm EST on Monday October 10, 2022.
- “Five Short Stories,” Morgan Housel, Collaborative Fund, 2022.
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