Fortune favours the brave: The hidden cost of playing it safe in business

Counting the cost of a missed business opportunity is almost impossible. After all, there is no line on a balance sheet or a profit and loss account to indicate the hidden cost of doing nothing or failing to exploit a market opportunity. Statutory accounts have no space for “what ifs”.

Yet, as history has shown, the true cost can be catastrophic. A classic example is that of Eastman Kodak. The company’s R&D department invented the digital camera in 1975, but a decision was made not to commercialise it in order to preserve the company’s core film and analogue camera business. Instead of leading the digital revolution, the company lost ground to competitors over the following decades and eventually filed for Chapter 11 bankruptcy protection in the US in January 2012.

Of course, in today’s business environment when companies are facing mounting cost pressures, market uncertainty and rapid changes shaped by geopolitics and other forces, playing it safe can feel prudent and appear to be the wise choice.

But, as the Eastman Kodak case proves, inaction is not risk-free. The challenge for business owners and leaders is to weigh the visible risk of acting against the less visible, and often compounding, cost of delay.

Decisions deferred today can narrow a business’s choices tomorrow, whether through lost market share, weaker productivity, diminishing capability or an inability to respond when conditions improve.

The cost builds gradually in other areas as well including ageing technology, higher operating costs, talent pressures and declining relevance to customers while reluctance to enter a market may allow competitors to establish relationships and scale.

By the time the effects are obvious, catching up may require significantly more investment, take longer and involve fewer strategic options. There is therefore a need to assess the cost of delay with the same discipline applied to the cost and risk of action.

The greater risk may not lie in making the wrong move but in making no move at all.

This is in no sense to make a case for reckless expansion; rather it is a case for informed, disciplined and timely decisions, supported by clear evidence, realistic scenarios and sufficient financial headroom.

Critically, businesses with strong liquidity, funding flexibility and balance sheet strength have more strategic options. In today’s environment, financial capacity is not simply a defensive safeguard. It is a source of competitive advantage. It gives businesses the freedom to invest, adapt and respond when opportunities arise.

In sailing, they say speed makes you a tactical genius. That can also apply to business. First mover advantage is a well-known competitive principle, but it can only be enjoyed by those with the financial strength to act quickly and decisively when an opportunity arises.

In these circumstances, there is a critical need to understand the difference between risk management and risk avoidance. Good risk management means understanding the downside of a decision, testing assumptions, planning a range of scenarios and ensuring the business has the operational and financial capacity to respond if conditions change.

Risk avoidance, on the other hand, asks, “How do we prevent anything going wrong?” Risk management asks, “How do we make a sound decision, define clear tolerances and remain resilient if the outcome differs from plan?”

Strong leaders do not wait for certainty. Certainty is a vanishingly rare commodity. People say they are not sure about the future, but we never have perfect visibility of the future. If we did, we’d know the Lotto numbers in advance.

The best leaders identify the critical assumptions, establish decision points, sequence investment where appropriate and preserve the flexibility to adjust course when things don’t go according to plan.

Investment in capability, technology, sustainability, people and new markets can therefore be a form of future proofing rather than risk taking for its own sake – provided it is aligned to strategy, supported by evidence and affordable under credible downside scenarios.

Conversely, failure to invest is handing an advantage to competitors who will have the more efficient plant, greater productivity, and a vital edge in growth markets.

A sound, practical framework should be employed when weighing up the risks associated with a decision.

In the first instance, leaders should ask what opportunity are they trying to capture, or what vulnerability are they addressing, and how directly does it support long-term strategy?

They should then look at the cost of waiting six, 12 or 18 months, including the potential impact on customers, competitiveness, productivity and talent. Next, they should look for evidence that gives them confidence to proceed and at the assumptions that need to be tested before committing fully. They should then ask if the decision can be phased, piloted or structured around clear milestones so that the business retains the ability to learn and adjust.

Finally, they should assess the financial headroom, management capacity and contingency plans required for the business to remain resilient under a credible downside scenario.

The best companies stress-test all investment decisions. If the objective of entering a new market is to add 10 per cent to sales, what happens if it’s only 5 per cent? That means having a contingency fund to cover for that eventuality. Once again, this underlines the importance of having a financial buffer to enable decisions.

Indeed, one of the most important lessons from recent years is that strong businesses need more than a great strategy, they need the financial capacity to execute that strategy. Liquidity, funding flexibility and balance sheet strength are becoming increasingly important strategic differentiators.

Businesses with financial headroom can invest when competitors are hesitant, respond more quickly to market changes, pursue acquisitions or expansion opportunities at pace, absorb economic shocks, negotiate from a position of strength and make long-term decisions rather than be trapped in short-term reactivity.

Liquidity should therefore not be viewed solely as a safety cushion. It is strategic optionality that creates freedom to act.

AIB can support companies both with the liquidity required to make those decisions and with advice on assessing and managing risk. Our role is not to tell businesses to take more risk, but to help them make better-informed decisions by bringing an understanding of the strategic objective, challenging assumptions and structuring funding that is appropriate to the business’s strategy, cash flow and capacity.

Our sector expertise allows us to provide a broad view of how markets, supply chains, technology and customer expectations are evolving and to apply that insight to the individual circumstances and ambitions of each customer. We work with customers to develop clear sustainable plans in which the level, structure and timing of finance support long-term growth without undermining the company’s resilience.

Of course, this does not mean borrowing for its own sake or pursuing every opportunity that arises. It means assessing the credibility of the underlying strategy, whether expected cash flows support repayment, management’s capacity to deliver and whether the business remains resilient under a range of scenarios.

Where an investment is viable, well-timed and appropriately structured, finance can enable a business to strengthen productivity, capability and competitiveness. Equally, there will be occasions when the right advice is to phase, reshape or defer a proposal. The aim is sustainable growth based on sound judgment – not growth at any cost.

Pat Horgan is head of business banking with AIB