How to protect your business against financial catastrophe

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Small businesses are the backbone of economies worldwide, but they often face unique challenges, particularly when it comes to financial stability. Protecting against financial loss is essential for their survival and long-term success, and I believe that taking a proactive stance towards financial stability holds the key to survival when things don’t quite go to plan.

Whether it's an economic downturn, unexpected expenses, market fluctuations or when a customer simply doesn't (or can’t) pay, there are many ways in which small businesses may face financial struggles – and the KBB industry is by no means immune to financial risk.

Aside from commercial collapse which is usually associated with bigger financial risk, especially to tradespeople who work with larger retail clients, consumer behaviour evidently changes when economic uncertainty becomes a factor. Simply put, many industries see a sharp incline of customers refusing or delaying final balance payments during recessional times, often using the balance as a way to barter on the final price, using a wide range of reasons why payment should be withheld.

So, whether it’s customers not paying or retailers facing financial collapse, it’s important that small businesses take steps to ensure that they are protected from third party shenanigans as much as possible.

The obvious solution would be that tradespeople take the payment up front, but sadly that’s not an option in most instances. It’s not something any sensible retailer would consider when agreeing terms with sub-contracted labour and taking full payment up front from private customers would not comply with fair trading laws.

So, how exactly can businesses protect themselves?

There’s no one answer to overcome the risk, but there are a number of proactive measures that will help to dramatically reduce the risk to any small (or bigger) business, should the issue arise:

ONE: Diversify revenue streams:
Relying heavily on one product, service, client or income stream can leave a business incredibly vulnerable, yet we see this on a regular basis. Businesses that ‘put their eggs into one retailer's basket’ is often where things go wrong. Diversification (working with more than one retailer/client)  spreads the risk and should be the number one priority for small businesses heading in to 2024.

Explore new or target different customer segments to create multiple revenue sources. This can help mitigate the impact of any one area experiencing a downturn or, in particular, one retailer going pop.

TWO: Maintain a cash reserve:
Small businesses are notoriously poor at building a nest egg, but building an emergency fund is vital. Aim to set aside a percentage of profit regularly to create a safety net for unexpected expenses or other financial stresses caused from outside influences such as an economic downturn. This reserve can cover operational costs during tough times without significantly impacting day-to-day operations or necessitating external borrowing. Whilst interest rates are dropping back to some kind of normal levels, generally speaking, they’re only really heading in one direction and subsequently, the cost of borrowing will increase over time.

THREE: Invest in insurance:
Insurance is a shield against unforeseen circumstances. Consider various types such as property insurance, liability insurance, business interruption insurance, and cyber insurance based on your specific industry and potential risks. While it’s an additional cost, it can protect against significant financial loss in case of accidents, natural disasters, or legal liabilities.

Our strategic partner,Marsh Commercial, provides solid advice and guidance to our industry and recently Client Executive, Grant Barnfather wrote a blog of his own looking at this area in particular.

FOUR: Implement strong financial controls:
Maintain a vigilant eye on financial operations. Regularly review cash flow, budgeting, and expenses. Implement internal controls to prevent fraud or errors. Utilise accounting software and seek professional advice to ensure accuracy and compliance with financial regulations.

There are loads of great financial solutions available on the market, with many tradespeople opting for software including Xero and Quickbooks. These solutions help financial planning and automate many areas of bookkeeping, including invoicing, purchasing and your HMRC tax returns.

FIVE: Build strong relationships with suppliers and clients:
Developing solid relationships with suppliers and clients can be invaluable during tough times. Negotiate favourable payment terms with suppliers to manage cash flow better. Cultivate strong client relationships to encourage repeat business and prompt payments, and make sure the terms are fair and reasonable for both parties.

SIX: Embrace technology for efficiency and protection:
Adopting technology can streamline operations and reduce costs. Automate routine tasks, leverage cloud-based solutions for scalability, and implement cybersecurity measures to safeguard against potential data breaches, which can be financially devastating. With private customers in particular, consider new tech to provide peace of mind, not only for you, but for new customers too.

Consider the Protect My Install platform to transact with customers… it takes care of quoting, payments, payment processing, contracts, variations, completion, insurance backed guarantees and even disputes – and for BiKBBI registered businesses, it’s free to use.

SEVEN: Plan for contingencies:
Develop a robust contingency plan for various scenarios. Anticipate potential risks and devise strategies to mitigate their impact. A well-thought-out contingency plan can guide decision-making during crises, reducing financial fallout. Again, BiKBBI registered businesses get access to lots of business planning templates to help with this type of planning – all accessible by the BiKBBI mobile app.

EIGHT: Seek professional advice:
Consulting with financial advisors, accountants, or business consultants can provide invaluable insights. They can assess your business, identify potential risks, and recommend strategies to minimise financial vulnerabilities.

We work with The Accurate Accountant who provide accountancy advice and guidance to our registered businesses and at a discounted rate too. The discount can be found via the BiKBBI mobile app too.

In conclusion, while it’s impossible to eliminate all financial risk, small businesses can take proactive steps to protect themselves. By diversifying revenue streams, maintaining reserves, investing in insurance, implementing strong financial controls, nurturing relationships, embracing technology, planning for contingencies, and seeking professional advice, businesses can fortify themselves against financial losses and navigate challenges with greater resilience.

Remember, the key lies in being proactive and adaptable. Small steps taken today can make a significant difference in securing the financial future of your business.

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