Six months ago, we walked into a Better Place dealership and bought the car at full price, bank loan and all. Two days later we cancelled the deal. My husband, the ultimate risk-avoider, couldn’t sleep knowing he had taken on a loan for a car whose future was uncertain. But we still loved the car.
Fast forward to three weeks ago. We walked into the same dealership and signed on the same dotted line, this time for a pay-as-you-go lease option with an NIS 20,000 ($5,000) deposit.
We were ecstatic.
Until the company went belly up. Before we got the car. Ouch!
As of this writing, we don’t know if we’ll get the car, our money back, or nothing. There’s talk of someone bailing out Better Place, but there’s little we can do about it right now.
Yet there is an important lesson about business risk to be learned from this story that you can apply to your company.
Our two Better Place scenarios are a perfect example of business risk concept called affordable loss. It means identifying the worst case scenario for a business or a project and then deciding whether to take the risk considering that the worst case scenario can become a reality.
For us, the worst case scenario was Better Place going bankrupt. Six months ago, we decided that we were not willing to stake the full price of the car taken on as a loan no matter how much we liked the car. The second time around, we took a calculated risk. We knew a bankruptcy was possible, but signing a lease was an affordable loss, a risk we could shoulder. Since we took on to pay for the car in small installments, which made sense compared to our other options, we reasoned that even if the company would go bankrupt we would only have paid for what we would have used.
Yes, we miscalculated the worst case scenario – a Better Place bankruptcy before we even got the car – but that’s a different story.
A solution based on affordable loss is different from how most entrepreneurs make decisions and approach business risk analysis (don’t worry it’s not a scary MBA word. Read on to see how you do that.) Often people calculate the expected return and then make the decision based on how much they stand to gain. The results can be catastrophic, especially when you risk more than your business can afford to lose.
And it doesn’t apply only to money. If you have ever invested all your time, energy, and emotion into a project only to see it fail, you know the depth of disappointment I am describing.
A decision based on affordable loss cushions you against catastrophic failures. All too often we get to hear about people who invested all they had into a business venture and then, when troubles hit took out additional loans to keep the company afloat. In the end, the families were left with a huge debt they had no means of paying off. Obviously, this is not something you want to happen in your business.
How to Make an Affordable Loss Decision
- Identify the worst case scenario for your project. What is the most you stand to lose?
- Calculate the greatest amount of resources (money, time, emotional energy) you can afford to invest in this project, so that even if your worst case scenario plays out, you will not be left stranded. Write this down and keep in a place you can find. This is your business risk analysis. (see you don’t even need an MBA to do that ).
- Try to imagine now what will it feel like if you fail. Can you live with this failure?
- Try to invest less than you can afford to lose. At no time invest more than the amount you have picked in you business risk analysis. In the heat of the moment, you may think it is possible to bail the project by investing more. Never exceed the amount you have written in the beginning, unless your affordable loss has gone up since the initial calculation.
- If you decide that the project is worth the risk, forget the failure and go for it!
- Keep a positive attitude. The business risk calculation is only an initial cautionary step. Your belief in the project and in your ability to pull it off is an essential part of your success.
We are hoping Better Place will survive and have a great future. We also hope to get to enjoy this car. Thankfully, understanding affordable loss has kept a painful event from turning into an excruciating one.
Have you ever invested more than you could afford into something? Please share your story.