MANAGING risk is key to being successful in business with most entrepreneurs akin to “skydivers with two parachutes” rather than “swashbucklers who take great risks”.

Scottish business stalwarts Sir Tom Hunter and Lord Willie Haughey, speaking on the Go Radio Business Show with Hunter & Haughey yesterday, discussed how entrepreneurs decide which risks to take and which ones not to, in response to a question from a listener who asked “is it possible to run a successful business without an element of risk”.

Both shared their own experiences of risk in the 1990s – Sir Tom’s a successful purchase of a rival business during his Sports Division days and Lord Haughey’s an unsuccessful venture into manufacturing.

Sir Tom said that while many people think that entrepreneurs are great risk-takers, he would describe them as a great risk managers. “When you are looking to invest you are balancing the pros and cons and you are managing the risk,” he said. “There is a phrase that the upside always takes care of itself but we are always looking to minimise the downside in any investment.

“The image of entrepreneurs being swashbucklers who take great risks – I don’t see that happening. Great entrepreneurs are managing that risk. They understand the business inside out, they understand every lever that they can pull.”

Agreeing with Sir Tom, Lord Haughey added: “I always say that we are like skydivers with two parachutes. It is about understanding risk and balancing the scales.”

Lord Haughey shared an insightful example of when he “got it wrong because I was greedy”.

He explained how in the early 1990s, when his business was mostly concentrating on refrigeration and air conditioning and he was selling bottle cooling cabinets – “more than anybody else in Britain at the time” – he decided to “get greedy and start manufacturing them myself”.

“I bought a factory in Southport and it was a big risk because I had never been involved in a business that was capital intensive – my business had always been a service business,” Lord Haughey said. “I spent almost £2 million over an 18-month period buying 150,000 sqft premises and equipment but I have to be honest – I did not do a correct risk assessment.

“It was all driven by greed and trying to take the margin that I was giving to manufacturers [I was buying from]. It turned out to be one of the worst mistakes I have ever made.”

Closing down the business but retaining the factory, he added: “There is a lesson there and it was a great lesson for me because every business venture thereafter I was over the top when it came to data. And it also made me steer clear of capital-intense businesses.”

However, he admitted that he had been shrewd not to sell the factory in Southport at the time because eight years later, he sold it and recouped all the money he had lost.

Sir Tom’s story about risk also saw him go back to the 1990s when his Sports Division business acquired its larger rival, Olympus. “It was eight times the size of Sports Division but I knew our figures on sales per square foot, the margin and our costs – those were my three key levers,” he said.

“I knew Olympus’s figures and ours were much better and I knew that if I could get their sales figures to be only half as good as my KPIs then I had won the big watch. They were losing £28m, we were making £4m.”

Sir Tom said his risk was to put faith in his “brilliant team”, noting: “We borrowed money from the Bank of Scotland in November and by Easter the following year I had paid all that money back. When I’d sat down and looked at my risk reward ratio, it was a no-brainer.”