Have you ever wondered how successful businesses reduce risk?
As business owners, we face a number of known and unknown risks that could derail our growth.
Having a business plan, watching your cash flow and getting the right types of insurance in place are all important ways to reduce business risk. There are also numerous legal pitfalls to be aware of.
I’ve created a list of 10 common risks that can hurt businesses of any size.
1. Create a business plan
A business plan details how your business will run and provides you with a framework for growth.
While it doesn't have to be set in stone, it's a good idea to outline how your business will develop. This helps to inform your strategy.
You might look at the first six months to a year or you may be looking at a five year plan. You may even be setting the objective of getting the business ready for sale.
The plan should detail how you intend to make money and grow the revenue of your business including all the various strands of your strategy such as sales, marketing, pricing, operations and suppliers.
The plan can also help you detail particular milestones, making informed decisions about the next steps; for example, do you need business loans or do you have any staffing requirements?
Are you looking to secure funding for your business or bring in experienced business partners? Having a clear plan will increase the confidence of anybody coming into the business.
The type of business plan you create depends on the type of business. For lean startups a common business plan might cover the following areas:
- Identifying what the objective of your business is
- Understanding your target market and why they should care
- Understand the competition and what you can do better
- Identify your financial goals
- Determine the structure of your business
- Outline your plan for marketing and sales
The above are just some of the things that can help you to plan in advance and understand potential risks.
2.Watch Your Cash Flow
Watching your cash flow and funding during the early stages of your business can help you avoid one of the most common risks; running out of money.
60% of new businesses are likely to go bust in the first 3 years.
You may need to pay suppliers, staff, for systems and equipment and even things like research and development. All of this requires cashflow.
Understanding the cash flow of your business can help you make better decisions and reduce risk when it comes to spending money.
It can also impact relationships with suppliers if you are not able to pay them promptly.
If you are looking to attract investors, having a clear understanding of your cash flow requirements and documenting it clearly can increase your chances of getting funding, as you'll be able to clearly state your expenses, your revenue and your financial targets.
3. Insurance against things going wrong
Insurance helps protect small businesses by taking on some of the financial burden if things go wrong.
From defective stock and workplace injury to business interruption and cover for your commercial property. The right insurance can cover you against unforeseen circumstances.
Common types of insurance include:
- Professional indemnity insurance - can help protect you against financial claims made by clients who have suffered loss further to using your products or services.
- Public liability insurance - can protect you against claims from members of the public who may have been injured whilst on your premises or as a result of your business activities.
- Employer’s liability insurance - can protect you against compensation claims if employees injure themselves or become ill whilst under your employment.
- Business interruption insurance - can cover you against any unforeseen crisis that results in you losing profit (like a global pandemic).
It's a good idea to seek independent advice on what types of insurance your business will need.
4. Contracts with partners, suppliers and employees
Contracts help you to limit the liability your company could face with clear terms and conditions between you and suppliers as well as clients and employees.
Further down the line, you may face claims for damages or disputes with suppliers and employees. Having the right contracts in place can help you reduce the risk and potential damages caused.
Employment contracts help you build the right culture for your business and provide security for employees as well as setting out what you expect them to contribute.
While B2B contracts do not remove all of the risk involved in dealing with other businesses and suppliers, they can offer you significant protection further down the line against any claims that you have not fulfilled your obligations.
B2B contracts can also protect your interests, creating clarity between all parties involved.
A commercial solicitor can advise you on the different types of contracts that your business might need, including business to business contracts and the best cause of action when a contract is not fulfilled.
5. Business Structure
If you don't apply the right structure to your business when it's formed, then you could face potential risks further down the line. The company structure determines how the business will be run and this can inform a number of agreements you might need, such as founders agreements, articles of association and shareholders agreements.
Such agreements determine how the business will be run and who has what power when it comes to making important decisions.
You need to establish whether you are a sole trader, partnership, limited company or limited liability company.
6. Protect Your Intellectual property
Be careful who you share sensitive information about your business with.
Tech startups are sometimes so keen to secure funding that they risk sharing information with the wrong people and at the wrong time.
Without a patent or the right contracts in place they could find that there are no copyrights, leaving other parties free to pick up an idea and run with it.
This could mean bigger businesses with deeper pockets could quickly surpass your business growth, using an idea that you thought was yours.
7. Reduce the impact of co-founder and boardroom disputes
Full of enthusiasm at starting a new business with another co-founder or co-founders, it’s easy to start issuing shares to everybody involved.
This could lead to complications further down the line, when a disproportionate amount of shares belong to those who have not invested as much time, effort or expertise into the business as other founders or board members.
A commercial solicitor can help you to manage relationships with other partners by having comprehensive shareholders agreement and articles of association in place.
This will ensure that you are aware of how to handle things like ownership changes and the issuing of shares in future.
8. Protect confidential information
GDPR laws still apply. You need to be careful about how you handle customer data and how you tell customers you will be communicating with them. Not handling data correctly can result in hefty fines, not to mention damage to your reputation.
It's not just customer data that you need to consider. You need to think about how you handle employee information from email communications to personal data. This becomes particularly important if you ever face an employment tribunal.
Confidential information belonging to your business could be protected by NDAs (non-disclosure agreements).
You should also be aware of the limitations of non-disclosure agreements, for example it is often difficult to prove a breach of confidentiality.
You should do everything you can to only disclose information that is absolutely necessary and limit the number of individuals who receive this information.
9. Employees
Hiring employees can be a risky process. How much do you pay them? What procedures do you have in place? and most importantly of all, how do you find and keep great employees?
You need to keep employees happy to ensure they don't go elsewhere. It's bad enough losing good employees, but it can be particularly painful when they leave for a competitor who offered them better terms.
As business owners, not only do we need to decide how to pay employees and how much, but we may even decide to give them some equity in the business.
You’ll need to have appropriate employee contracts in place to protect you and your employees as well as fostering the right culture in your business.
10. Get help early on
Accountants, HR professionals, business advisors and of course commercial legal advice can all be valuable assets throughout the life of your business.
You can waste valuable time and money trying to understand the various legal pitfalls that take many startups and established businesses by surprise.
You should be aware of the legal services that startups and small businesses need to help them reduce risk and thrive, from setting up and structuring your business correctly, to b2b contracts and seed funding.
That’s why we’re here.Get in touch if you have a question.