Top risks to be aware of when running a business…
As part of Fistral’s 21st anniversary year, we’ve asked the Directors to share their thoughts and experiences on a variety of business-related issues. In the second of the series, they talk about the Risks associated with starting an SME.
For the second set of Top Tips, we asked:
“What are the top risks associated with running an SME?”
And being in the ‘Risks’ business, they should know what they’re talking about… Paul and Fraser say some of the key pitfalls are:
- Tracking your incomings, outgoings and borrowings on a month-to-month – if not week-to-week – basis is core to keeping the business working. Knowing what’s due – and when – and what’s outstanding is crucial, especially for SMEs. Don’t trust this to your financial team – do it yourself or you’ll never know the status of the business. And large outgoings mean that you may not survive till the next busy period, so keep the outgoings low, and keep some monies in the business to carry you over the quieter times. The old proverb of ‘looking after the pennies’ has survived for a reason…
- Taking the time to create a robust forecasting model (even in Excel) to project the financial status of the business will allow planning both for growth and leaner times. And there will certainly be times when business is slack. Where you can, base this on details from previous years. Remember to include all employer and employee contributions; and don’t forget your tax liabilities!
- Common sense says that if you spend more than you make, the business will not survive. However it can difficult to bear this in mind when you want to grow a business, or it’s already in trouble. One way to avoid acquiring debt that the business doesn’t really need is to think frugally and and be very careful what you borrow. There are temptations out there and lending is encouraged in the current climate; however you don’t really need that new BMW and fancy office; but the tax man does need his tax at the end of the year.
- Customer Base
- Don’t get complacent about how successful or popular your business is or how happy your customers are with what you are doing. No matter how good your product is, you can lose customers and you need to constantly find new customers to keep the company afloat. Not only can you always do better, but the climate can change in moments and hit an SME hard. All it takes is new management, a customer’s organisation to refocus, a new Prime Minister, a competitor to enter the arena, budget cuts, or a million other reasons. Even when you regularly break even or make profit, the landscape can change overnight. The search for new customers should be ongoing even through the good times – there’s no point in waiting for the bomb to hit to build a shelter.
- Employing the wrong people can be the death of a small business. In a large organisation, if someone makes a mistake or takes the wrong decision or acts unprofessionally it is forgotten about; in an SME it only takes one person to totally ruin your reputation and therein your business. And the financial burden and organisational commitment that staff bring adds other pressures. Over-employing in order to make the business look bigger and better than it is is also risky and does no-one any favours. However employing the right people is a true company asset as they are worth their weight in gold: especially a good book-keeper.
- Work Life Balance
- Everyone talks about this, and few manage to get it right; however striving for a good work-life balance is really important. Spending too much time in work and allowing family relationships to suffer is a recipe for personal and professional disaster. Over-extending yourself in either sphere is damaging, causes burn-out, and is never rewarding. It can be difficult to keep a sense of perspective in your own business, as you can work every hour of the day and there is always something else to do… And in today’s smart-phone generation this means work ‘nags’ can invade not only the office but external meetings, the home – in the bath, at mealtimes, with the kids – and on holiday… Knowing when to switch off (literally) keeps relationships alive and personal sanity. Consider having a separate work number on your mobile, or divert calls with a special ringtone that can be turned to silent when on holiday.
- Keep your business and yourself separate
- They are not the same thing, although it may feel like it most of the time. (N.B. this is not work-life balance.) Be careful what you tie-up with your business: for example a second mortgage means your house is at risk, so think carefully. Retaining some of the profit in the business takes the pressure off year-on-year: and not over-paying yourself or over-spending on business items in the short-term means the company has some security longer term. Don’t expect your personal finances to mirror or be directly proportional to the financial standing of the business. And just because there’s money in the business, doesn’t mean it’s your money to spend as you like. Normally it belongs to the tax man.
- Protect this at all costs. Truthfulness, openness and trust are the foundations of a good business and should underpin not only your actions, but also those that you employ or work with.