How to manage your business risk

Small business owners, especially solopreneurs, often find themselves so busy ‘doing the job’ that they allow themselves very little time to think about managing business risks.

However it is often this inattention paid to business risks that results in business failure – rather than the business owner being incompetent at the skills of the job.  Hairdressers don’t go out of business because they don’t know how to cut hair, but because they don’t know how to manage the risks of running a business.

There are many business risks that require managing but below are three of the main points to consider.

Have the right business structure

There are three main ways to structure a business, however, the first questions I ask when discussing the right structure with an entrepreneur are not about structure at all. Instead I ask questions about 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 want to run a business you then have to decide which structure you use. Getting the right structure from the start will minimise the risk of business failure.

This choice 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 envision the business in the future?

Sole trader

If you are in business by yourself and have no intention of expanding beyond that then, you will probably elect to be a sole trader. If the business grows to take on further employees, you will generally need to move to a different structure.

Partnership

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 their personal assets if the business fails. The partnership does not pay tax, rather the partners pay tax on their share of the partnership income.

Proprietary company

A proprietary limited company has shareholders who own the business, while its directors 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, ideal for entrepreneurs who want their business to grow.

Protect your cashflow

Whatever its structure, no business can survive without cashflow.  The easiest way to protect your cashflow is to make it easy for your customers to keep the cash coming in.

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 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. It’s better still to sit down with them and go through it together.

The letter of engagement should outline the purpose, scope and output of the business relationship, the fees involved, when invoices will be sent and when they should be paid by. When a client is aware of their obligations and receives a good service in return, there is rarely any future problem with payments.

Make it easy to get paid – You need to give your customers as many alternatives to pay you as possible.  Many transactions are carried out online today and this option should be made available.

Charging upfront – If you’re worried about a client or a customer not paying their bills then make sure 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 you the use of those funds. But it also means that if the client declares bankruptcy or goes into administration, you will not be a creditor.

Direct debits – If your customers are paying via direct debit, you don’t have to send out weekly or monthly invoices, there’s no need to send reminder notices and no-one pays late.

Work in the business not on the business

There may be dozens of immediate reasons why a particular business is struggling, or not meeting original expectations. However, I believe most will not be the root cause of problems or the reason for eventual business failure, instead they are symptoms of a deeper malaise.

There are, in my opinion, just three underlying reasons for an ailing business. Your business is not running well, or at least could run better, due to one or more of the following:

1. A lack of business skills in the business.

2. A lack of attention to applying business skills within the business.

3. Spending the majority of the time working in the business rather than on the business.

You may be a technical expert or even a 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 a job in itself.  Like all important skills it requires time and investment to learn.  Business risks can therefore be minimised by improving your ability to run your business well.