How a Chartered Accountant Can Help You Tackle the Reality Principle
Author: Russell SmithOctober 7, 2015
Discover what the reality principle is, why you should care about it, and how we can help you tackle it.
The reality principle is part of Freudian psychology and simply refers to our ability to see the world as it is and act appropriately to the situations we are presented with.
Some people are bad at doing this, making irresponsible decisions, exhibiting reckless behaviour and following blind beliefs that inevitably prove folly.
The reality principle is not only an important part of healthy human psychology. It’s also important when it comes to a healthy business, too.
How Does the Reality Principle Impact Business?
The business world is grounded in reality. It isn’t a fantasy where dreams simply come true from sheer determination and desire.
A business does not become successful because the owner wants it to be so. It becomes successful because they make the right decisions based on market, capital, investment opportunities, skills, resources and more.
What Happens If I Ignore the Reality Principle?
Irresponsible and reckless decision making in business is the fastest way to collapse.
In the business world, there is a lot of talk about the proper ‘business acumen’. It is often referred to as something that helps sniff out good opportunities, but in reality, it’s more about people being able to see the reality in front of them.
Making realistic choices allows you to achieve results. Making unrealistic choices risks total failure.
Consider a business owner wants to expand. She has two options: sell Product A or Product B. When it comes to Product A, she has experience with these kinds of goods, knows the market and how to make money. However, the margin is small on the product. Product B, however, is new and exciting. She hasn’t ever used it, doesn’t know how it works or what the market is for it, but knows the sales margins are very high.
She then takes these products on Dragon’s Den. Which do you think the Dragons will invest in? The safe, slow-burn product with guaranteed success, or the exciting new product you don’t really know how to sell, but can make you a lot of money?
These champions of business, experts with elite-level business acumen, aren’t going to go near Product B.
Because it isn’t realistic. It has the potential to achieve success for sure, but will it? If you invest in an unrealistic business venture, you are far more likely to fail.
Failure and business do not make for a happy union.
How Can a Chartered Accountant Help Me Tackle the Reality Principle?
Following the reality principle might seem like a guessing game, but it is actually pretty simple when you break it down.
In business and in life, the reality principle is all about data. Looking at the past experience and knowledge of our business owner, we can look at the reality of the situation. For Product B, the reality is simple.
Is it possible to succeed? Yes.
Is it realistic to expect it to succeed? No.
Essentially, it all comes down to the mathematics of it all; the chances of whether something is possible. Chartered accountants are at the top of the pile when it comes to maths and probability and, as such, we are adept in the art of making realistic business decisions.
This is the kind of thought process that can be applied to your business to help you work with — and succeed through — the reality principle.
Using the reality principle is like a safeguard. It prevents you from making bad decisions by relying on data that all but ensures success. However, using this Freudian idea doesn’t mean our business owner has to forget about Product B. It means she needs more time and investment in learning about the reality of the product before using it to grow her business.
Should I Always Follow the Reality Principle?
Following the reality principle depends entirely on your business goals and targets.
The methodology behind the reality principle is designed to assure success and allow you to deviate from any paths that might prove unachievable. But, although not always true, following the reality principle generally means slow-burn business. It does not stop growth, but it means it comes at a steady and predictable pace.
As mentioned in our earlier analogy, it is not realistic to assume that Product B would sell and sell well, but it is possible. Going with Product B would be a risky move outside the reality principle.
These risks can reap the biggest rewards, or cause the greatest costs. Our product might defy the odds, making us filthy rich, or it might totally collapse, never sell and leave us with an empty bank account.
Plenty of business owners take these risks. For example, Elon Musk was once faced with a conundrum. In 2008, during the financial crisis, his business Tesla was facing collapse. No money left, no investors interested in what they considered a dead company, he invested his own money — his last few million — into the company. That money saved the business and turned it into a billion dollar company, but it could have easily just been absorbed, leaving him with nothing.
There is nothing wrong with ignoring the reality principle if you believe it is worth the risk, but you must be prepared to deal with the consequences.
Need help tackling the reality of your business? Our chartered accountants are waiting to support you!