How to manage your business risk
Small business owners and especially solopreneurs often find themselves extremely busy ‘doing the job’ that they allow themselves very little time or thought about managing business risks. It is often the inattention paid to business risks that results in business failure – and not that the business owner is incompetent at the tasks of their business e.g. not because a hairdresser is a bad hairdresser.
There are many business risks that require managing but below are three business risks to manage.
Have the right business structure
There are three main ways to structure a business, however, the first questions I ask when posed with the question about the right business structure is not about structure at all. I ask questions around what the enterprise does and what the primary motivations are for running the enterprise. Why – well the enterprise might not be a business at all – it might just be a hobby.
After you determine that you are a business you then decide which structure you use. It will depend on several factors: What type of business will it be? How many people will be involved? How will the profits be shared? What will be your legal liability? How will the tax be paid? Where do you envisage the business in the future?
If you are in business by yourself and envisage the business to stay that way, then you will probably elect a sole trader structure for your business. If the business grows, you will generally need to move to a different structure
You choose the partnership structure when two or more people start a business. In lots of ways, it is like a sole trader structure in that a partnership is not a separate legal entity. The partners’ liability is unlimited and can extend to personal assets. The partnership does not pay tax, rather the partners pay tax on their share of the partnership income.
A proprietary limited company has shareholders who own the business and directors who run the company on their behalf. You only need one shareholder and one director, and it can be the same person – it can also be you, the person who starts the business. A proprietary company is a scalable business structure.
Protect your cashflow
The easiest way to protect your cashflow is to ensure cash in keeps flowing and does so with ease. Fred Adler, the pioneer of venture capital markets in the USA, had a famous epigram ‘Happiness is a positive cashflow’. One of the attributes of a successful business according to Fred was having cash where and when you need it. Five tips for keeping the cash flowing into your business are :-
- You have to accept credit cards – There’s no doubt about it, you’ll make more sales if your business accepts card payments. The use of cash and cheques is declining, and card payment use is inversely increasing. If your business doesn’t accept cards, including credit cards, you will start missing out on sales
- Send a letter of engagement – If you are a service provider then prior to commencing work with a client it’s a good idea to send an engagement letter and ask them to sign and return it. (better still sit with them and go through it together). The engagement letter should outline the purpose, scope and output of the engagement, the fees and when invoices will be sent and be required to be paid. When a client must overtly do something, they become very aware of their obligations and usually there is never any further discussion about invoices.
- Make it easy to get paid – You need to give your customers as many alternatives to pay you as possible.
- Charging upfront – If you’re worried about a client or a customer not paying you get paid upfront. This means you won’t be waiting past a due date wondering when or if you will get paid. You will not be providing working capital to your client that costs us use of those funds. But it also means that if the client declares bankruptcy or goes into administration, you will not be a creditor and have never been one.
- Direct debits – If your customers are paying via direct debit, you avoid the following tasks:
- You don’t have to send out weekly or monthly invoices
- There’s no need to send reminder notices
- No-one pays late.
- Make it easy to get paid
- Charging upfront
Work in the business not on the business
There are dozens of reasons or causes espoused as to why a business is struggling, or not meeting original expectations. However, I believe most are not the cause or reason of business failure, instead they are symptoms.
There are, in my opinion, three valid reasons for an ailing business. Your business is not running so well, or could run better, due to one or more of the following:
- A lack of business skills in the business
- A lack of attention to applying business skills within the business
- Spending the majority of the time working in the business rather than on the business.
You may be a technical expert or genius practitioner, but you also need to know how to run a business. The good news is that running a business is a skill – and skills can be learned. All you need is some devotion and time. Running a business is a separate skill and job and therefore requires time and investment to learn and develop these skills to become capable and competent to do the job well.