It goes without saying that one of the reasons entrepreneurs are successful at growing wealth is that they are risk takers. Some entrepreneurs argue that in fact there is little risk in what they do, because they fully analyse the financial implications of their wealth-building strategies before they part with their money. Even so, they are betting on their own ability to predict future outcomes accurately. It’s not hard to think of entrepreneurs who have made and lost several fortunes in their lifetime, or who have a list of failed projects alongside those that were successful.
Being on a high growth path to wealth creation can be addictive. When money comes easily, why not keep making more? Cash flow is the life blood of any business and strong cash flow creates the opportunity for expansion. In the extreme, entrepreneurs who rely on cash flow for growth in effect create their own Ponzi scheme. It works well as long as the cash keeps rolling in, but if for any reason the cash dries up, the business quickly collapses like a house of cards.
There is a simple solution for avoiding complete devastation. Every entrepreneur needs a financial safety net – a store of wealth that is ideally unencumbered, and kept separate from the business. Instead of using all the business cash flow to fund expansion, some is diverted into other investments that have a lower risk profile, such as property. This store of wealth can provide a minimum standard of living or a foundation on which to rebuild a business in the event of a failure. For this strategy to be successful, the safe assets need to be protected via legal structures from business creditors and any temptation or pressure to use them to rescue a failing business must be resisted.