Essential knowledge for a new business – risk management

There are many things that can result in a business failing and a good business does two things to deal with these risks. Firstly they do what they can to avoid the risk in the first place and secondly they have strategies in place to deal with the risks that are out of the business owners control.

So lets have a look at the risks and how to avoid, or at least mitigate them.

Bad Debts

It’s a fact that sometimes your customers will not pay you, and the reasons are numerous. Examples are:

  • They’re unhappy with the work you’ve done or the product you’ve supplied.
  • The business itself has failed.
  • The business is having cash flow problems.
  • The customer is trying it on.

A good credit control process will help to avoid these problems and this should start before you even accept an order. You should do a bit of research about potential customers [these days companies house offer free company information] and award them a credit limit. Only allow them credit up to this level. Make sure that you agree in writing the cost of the work you are carrying out and confirm when the work will be carried out and when they will be invoiced. Make sure all customers know your credit terms. When the invoice has been sent out, contact the customer and check that it has been received and is order – ask for an expected payment date. After that you should follow a robust credit control procedure with regular contact until it is paid.

It is also a great idea to have a set of business terms and conditions and make sure that your customers are aware of them – if you can get them to sign to say they are accepted then all the better.

If you are providing goods then make sure there is a signed delivery note, or for services a signed time sheet if possible.

Businesses that operate as Limited Companies can go bust without any personal responsibility on the owners to pay you, so if there are rumours that a customer is in difficulty, then they need special attention to make sure that you’re one of the lucky ones that is paid. It is a good idea to have a clause in your business terms that says that the Directors confirm that the company is able to afford whatever it is buying from you. This is often enough to persuade the Directors to pay you in the event of a business failure.

If a debtor is refusing to pay then eventually you may need to take them to court. There is a cost to this and if the amount is over £10,000 the other side can ask you to pay their costs if you lose, so be careful. If its under £10,000 and you know the customer can afford to pay but is just trying it on this is something you can do yourself. Click here to make a claim.

Sometimes because of something that you couldn’t control your invoice might not be paid and there’s no chance of recovering it. In these circumstance bad debt insurance would have paid out so that you’re not out of pocket. This can be expensive and so should be considered carefully, but may be appropriate for a high value piece of work and you may be able to build the cost into the contract.

Employee problems

Employees have lots of rights these days; minimum wage, statutory holiday pay, sick pay, maternity pay, paternity pay, the right not to be discriminated against, compassionate leave, etc.

The best way to prevent coming a cropper at an employment tribunal is to have a robust HR process. Employees need job descriptions, employment contracts and they need to be treated fairly as defined by the employment rules. Losing at employment tribunals tends to be because you’ve not followed the correct procedure rather than the treatment of an employee was wrong.

We can help you to help yourself put the right processes in place. For a water tight solution you can engage [normally by monthly subscription] an expert to deal with all this for you and cover any losses, let us know and we can put you in touch.

There is also the risk that staff might be injured or worse in the course of doing their work. It is a legal requirement that all businesses have employer liability insurance to pay out in the event of an accident that was the employer’s fault. We can help you find the best place to obtain this cover.

Customer claims

Sometimes things go wrong with the product that you’ve supplied or a service you’ve delivered. If things get serious then these can be massive claims on a company. We recommend that if this is even a remote possibility then a business should trade as a Limited Company. This way in such circumstances the business owners can walk away from the company and not suffer an attack on their personal assets. There are circumstances where the corporate veil may be taken down, however.

The second risk management strategy and essential for non incorporated businesses is professional indemnity insurance. Again this covers compensating the customer if the business has made a mistake that results in a customer making a loss.

Owner disputes

If you’re in partnership with someone in the business, when you start out you expect everything to work out and there never to be any disputes. That is mostly the case and there may not be an almighty fall out, but in any business there will be times when opinions differ about certain decisions.

There will also be changes in circumstances, divorces, deaths and illnesses. You may even be in partnership with your spouse and the marriage or relationship ends .

These are all issues that can be mitigated by a good partnership or shareholders agreement. This is the sort of thing that should be prepared by a lawyer, but even if you just agree and write down what you agreed between you that is better than nothing at all.

Your lawyer would advise you what needs to be covered and of course we can put you in touch with a good one, but below is a list of things that should be covered.

  • How are profits and losses shared?
  • How is the business funded? What happens if more funding is required?
  • What happens over minor everyday decisions if the parties can’t agree, does someone have a deciding vote or can either party do a veto?
  • How does it work if one party wants to leave?
  • How do you cope with illness, death or pregnancy?
  • What happens in the event of fraud or gross misconduct?

If you get this all sorted at the start when there are no disputes this will save a lot of problems later on.

The unexpected

The legal implications of death or illness are not the only concerns, how does the business continue after a death or during a long period of illness. How do the family members cope with the financial shock on top of the emotions.

This aspect ties in with a good partnership or shareholders agreement, but in addition there needs to be a will, a power of attorney and some financial protection.

Illness

Illness may mean an inability to work and possibly an inability to make decisions. So there needs to be two strategies in place to cope with both options.

Where an owner can’t work the business will need to continue and the duties that they carried out will need to be carried out in their absence. Finding the funds to pay someone to carry out these duties in the interim can be tricky when the business is already suffering. This is normally where key man insurance can be used. The insurance can be set up to pay out in the event of long term illness. These funds can be used to pay someone to cover the duties or help the family with expenses during the period that the owner is unable to work.

If the business owner is able to continue to make decisions but just not attend work then the key man can help to keep things going until they are well.

But if the business owner is not conscious then a power of attorney may be used that allows someone else to do so in the interim. This may also be needed to deal with everyday things like making payments. A power of attorney is a legal document that allows another person to represent the business owner during periods when they are unable to themselves. This could be a spouse of business partner or trusted advisor, like the accountant or lawyer. 

Death

Unexpected death is not common but it happens and the prudent business owners should have a strategy to cope with it. Of course the older a person is, the likelihood increases.

The best strategy here is to have a clear will, for many reasons, but we’re just looking at the business aspects today. The will expresses the business owners wishes about what happens to their share in a business if they die.

They can leave it to their business partner but in most cases to protect the financial future of the family it is left to the spouse or children. There are normally two scenarios; either the business owner has no other partners or they are part of a business with at least one other owner.

Sole Owner

In these circumstance the family inherit the business and the chances are that they, at least in the interim, have no interest in running it. This is where life insurance taken out by the business can help to pay someone to run the business in the short term or provide a financial buffer until the family is able to deal with the business.

Once the family are able to deal with things, the business can be sold or run by them, but in the interim it will not have been damaged too much.

Multiple-owners

Under these circumstances the other business owners could eventually end up with a new partner. One that may not have the necessary skills to do what the old partner did or may not wish to be involved [at least in the short term].

What can help here is for the business to insure the life of the owners and the funds be paid to the business in the event of a death. The business can then buy the deceased partner’s estate out.

This allows the business to continue but the surviving partners saved from the financial shock sourcing the funds to buy out their former partner. The family is able to obtain a fair value for the business and deal with their grief free from the financial shock.

So the strategies to deal with death and illness depend on the circumstances and wishes but we recommend a will, a power of attorney, and some sort of financial protection.

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