What separates those who make money and keep it, from those that make money and lose it?
Some would say it’s fast cars, hookers and blow but that’s just the property developers. More fundamentally, it’s a human condition. I’d observe that previously successful bankrupts almost always have unbridled optimism. Alone that’s not enough. They also lack a perception of risk (they’d say risk doesn’t phase them.) And predictably, the icing on the cake is a gambling mentality where they seldom take money off the table and misjudge cash flow.
Property development (which I’ve only dabbled in) is littered with optimists and bankrupts. I’ve witnessed firsthand a thrice bankrupted developer use their share of the future profit on a development (not even started) as security to help fund them into the next development. It’s not just property developers. I had an unpleasant encounter with a woman who owned a beautiful debt-free coastal property and who lost it to mortgagee sale. She initially borrowed on it for an investment that went sour. After that she kept borrowing on the property using finance companies religiously in the belief she’d miraculously find a way out of her predicament. This went on for over three years until eventually no-one would lend to her. She then borrowed off friends, which kept the tragedy going until inevitably she lost the house. Same outcome - but with millions of equity wiped out.
Often people are blinded by their passion. I’ve helped a number of business people dig themselves out of holes that otherwise consumed everything – money, relationships, friends. In one case, I helped a guy who had put everything on the line with a business that a government agency could strike out with the cross of a bureaucratic pen, which they did. He didn’t see it coming and had his life savings on the line.
Cash flow is the life blood of any business, and a lack of it is what ultimately sends businesses to the wall. It’s like boiling a frog in an open pot of water. The frog doesn’t notice the change in temperature and doesn’t jump out. A cash flow crisis is often the culmination of a series of small ill-considered decisions and a lack of awareness or preparedness when circumstances change.
So what’s the most important thing I’ve learned from jumping into businesses? Always have a Plan B and a Plan C and always make the hard decisions early on.