There are a number of ways to prepare, to strategize, to grow, and to maneuver. I have learned many things from great operators as they sold customers, negotiated with suppliers, managed inventory, increased cash flow, and motivated their people.
One thing I have noticed is that great business decisions, processes, and strategies often involve creating and maintaining optionality. This is done, not as a way to hedge bets and keep open many possibilities (as that drains resources), but rather as a guide to preventing disaster and lowering risk. Here are a few of the ways I have used this decision principle.
Higher Cash Levels
Once you spend your cash, you can’t use it for something else. Spending cash reduces optionality; accumulating it grows it. Cash as a decision has a low to negative return, so it must be deployed; however, understanding that holding cash opens up options is key in its management and deployment.
Early Problem Detection
The later you find a problem, the less time you have to correct it, and the more expensive it will be due to your urgency. Therefore, preventative investments and early reviews allow for maximum time. As you have more time, you have more options and those options cost less.
When something, let’s say revenue, is wholly dependent on one source, you lose in your ability to make decisions that would reduce or eliminate that source. Power shifts to the source. This leads to decisions that may go against ones you would ideally make. You lose optionality and are forced down a focused path. Increases sources of revenue, suppliers, labor, and anything else increases your optionality in making ideal decisions.
Buffers are something I have always felt were important. Buffers in time, cash, and knowledge are key. Why do something later when you can do it earlier? Why cut things close? Creating buffers comes at the cost of full optimization. However, optimization comes at the cost of sustainability and survivability.
These are a few of the ways in which I have found optionality being a key principle in creating a sustainable business.