Small business risks – how to mitigate them by taking little steps

Small business risks are inevitable, but you can mitigate them if you take little steps

If you’re a small-business owner, you’re by definition a risk-taker. The danger, however, of being comfortable with taking leaps of faith is that you can sometimes overlook smart and simple ways to minimise small business risks which will damage your leap, ending in a fall.

Here are seven ways you can mitigate small business risks:

1. Be cash-conscious
The number one risk for most small businesses is improper cash-flow management. Calculate every month how much money you have on hand and how long it will last if your income dries up. Also evaluate monthly your total accounts payable and the number of days accounts are outstanding because a slowdown in accounts payable will lead to cash-flow crunches.

Avoid those crunches by creating a contingency plan and setting aside three to six months of operating costs in reserves. In the contingency plan, ask where your business would be three to six months from now if you lost your biggest client. Which expenses could you cut? Which would you have to keep paying? That number of three to six months is variable because you could have cash-flow problems for various reasons. Losing a key customer could take away 50 per cent of your revenue, but it might also take away 50 per cent of your expenses.

2. Insure against your specific risks
It’s not enough to purchase standard insurance policies. You must know the specific risks your business faces and insure against them. There are a lot of key risks that business owners don’t realize they’re not covered for. If your business includes an online component, determine how effectively your policies cover that aspect of your business.

3. If your business changes, your insurance should, too
Meet annually with a trusted insurance broker to determine whether your business has changed in significant ways that require modifying or adding coverage. Go through a checklist of coverages and have a discussion. What new things have you done in the last year? Have you acquired a company, introduced a new product, begun to do business in a new state or country, hired different people — all those things might trigger a new risk.

4. Insure key people
If key staffers leave or can’t perform their duties, your entire business could fail. You’ve got to have key-person insurance on anyone who’s mission-critical to your business. If you already have key-person insurance, review your policy quarterly because it may be outdated if your business has grown dramatically.

5. Use contractual indemnification clauses
Seek indemnification for potential damages caused by other businesses and people your business relies on regularly. For example, if you distribute a piece of software to your customers, and if the provider didn’t have the rights to the software, and you get sued. That’s where indemnification comes in. But it’s only as good as the finances of the other party. If you’re worried the finances on the other side of the contract aren’t sufficient for the possible risk, you can contractually require the other company to maintain insurance.

6. Give yourself an out
If you launch a new venture or enter into a new contract, you need to be able to cut your losses if it goes bust. Your contract should cover how you can end the relationship, and what happens when you do.

7. Create separate entities
Any time you take on a new risk, consider creating a new legal entity. If a new risk involves the same market but a different set of customers, you probably don’t need a new entity. But if it adds additional risks from a monetary, lawsuit or partnership standpoint, you need a separate entity. Any time you cross state lines, add partners, or add legal risks your current business doesn’t already deal with and that you’re not insured for, look at separate legal structures.

Also use separate entities to prevent the loss of your assets. Whenever significant long-term assets exist, consider a separate holding entity. Real estate is the prime example. Put property into a separate entity, and rent it back to the business. Another example could be patents for your products.

Don’t shy away from creating new entities because of the cost. The key to minimising small business risks is foreseeing and preparing for them. Small-business owners can get off track by falling into the prediction trap. You assume that what happened yesterday is going to happen tomorrow. But you need to be really clear on the small business risks affecting your business model.

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