Risks are intertwined with responsibilities. As you go through the process of identifying and guarding against all the things that could possibly go wrong, you can’t help but realize the weight of the responsibility you’ve undertaken.
A few semesters ago, I asked the students in my small-business and entrepreneurial-finance class whether they could tell me why it was important for owners and managers to be on top of their company’s financial performance. The first two responses were predictable: “So you can know if you’re making money” and “So you can know if it’s worth it.”
Money’s important, but profitability (or the lack thereof) is nothing more than a by-product of the manner in which a business is run, just as high FICO scores are a by-product of the good financial lives we lead.
Reversals of fortune are swift. When the focus is only on the money, the temptation to take on more risk—or worse, to cut an ethical or moral corner here or there—may very well derail what may have once been a good operation, just as it can personally. I’ve worked for companies where this has occurred, and I’ve experienced firsthand the misery that ensued. And yet none of this seemed to be in the forefront of my students’ minds, which made me wonder whether we’re teaching them the right things in our business schools.
Successful, enduring businesses are run by leaders who understand and fully embrace the responsibilities they have to the five constituencies that helped make their achievements possible:
You can’t have a business without customers, clients or patients. Your responsibilities include delivering good-quality products and services that are fairly priced, which will be hard to do if your business isn’t financially sound or properly run.
You can’t operate a business without credit. Your responsibility is not only to repay the money you borrow but also to appropriately manage your finances so you’re able to satisfy the additional requirements of the loan agreements you’ll be asked to sign.
You won’t be able to create—let alone expand—your business unless you have the support of your financial backers, which often include family members and close friends. The capital they provide isn’t a gift. You’ll need to pay it back, whether in the form of an annual share of profits or a percentage of the proceeds when the company is sold. Demonstrating that you have a good handle on your company’s financial performance will help them feel comfortable about entrusting you with their money.
The companies that supply the materials you need to create the goods and services you sell have to be paid. On time. Otherwise they won’t do business with you again, or if they do, they’ll jack up their prices to compensate for your lousy payment practices. Consider the impact on your competitive position should that happen.
This final category of constituents has actually stumped my students. They were so focused on finding jobs after graduation, they never considered the possibility that their employers might not be able to pay them for the work they were hired to do.
I told them about the day my wife and I brought our newborn son home from the hospital, how I stood over the bassinet that we placed against the wall across from my wife’s side of the bed and watched him sleeping peacefully under the baby blanket a friend had knitted for him. He was beautiful and perfect, and I couldn’t have felt more overwhelmed by the realization of the responsibility I now had.
I explained that I felt the same way on the day I bought my last company. After all the papers were signed and the wire transfers completed, it wasn’t only that I was then responsible for a 50-person payroll, it was also that my employees trusted me to meet the payroll obligation. These were the men and women who were the principle breadwinners in their households, the ones with kids in day care, parents in nursing homes, and mortgages and car payments to make. If things didn’t work out, my personal failure would be multiplied by a factor of 50.
When you look back upon the spectacular demises of such companies as Enron, Washington Mutual and Lehman Brothers, and recall the images of stunned employees carrying boxes of personal belongings from the office buildings in which they once lived out their professional lives, you can’t help but wonder how things might have turned out differently if the executives of these companies had respected those without whom they would not have been in business in the first place.