All company owners understand that small business is inherently risky. Small companies may not have cash reserves for emergencies, they can be dependent on certain employees. Failures of customers and suppliers can be fatal to small companies. Governmental and political decisions can hurt companies unexpectedly.
The business risk never goes away, but it can be reduced. Here are some ideas to help owners reduce their risk.
Don’t put all your eggs in one basket — Companies that depend on one, or a few, customers can be seriously damaged by loss of the account. Imagine what would happen when the company’s biggest customer gives 30 days’ notice that they were changing to another supplier.
A rule of thumb is that a company’s largest customer should be no more than 15% of total revenues and the top three should be no more than 30%. This doesn’t mean cutting-off your best customer, but it is wake-up call to look for additional customers who can grow large, too. Fully reducing concentration usually takes time to develop, so it is good to start immediately to look for adjacent customers and markets that will diversify the customer mix.
Don’t buy all your baskets from the same vendor — Like customer concentration, reliance on a single-source vendor is risky business. A key supplier might be sold to another company that does not value your old relationship. A key supplier may have a business interruption event that shuts them down.
Good insurance is to be sure that there is a 2nd-source for key purchased items. Many companies like to have at least three sources for essential materials and supplies.
Cross-train key people. This applies to everyone. Whether they are owners, management, or operating employees, some individuals are essential to the business. They may have key customer relationships and key supplier relationships. They may have important knowledge about products and processes, and maybe the “secret recipe.”
Big companies focus on having depth in their employees. If one is suddenly gone, there are others that can move up or across to fill the void. For small business, the remedy is two-fold. (1) Cross-train key people — find employees who can fill-in certain tasks that are critical to the company in case of a key employee’s short-term or long-term inability to do the job, and (2) Document the critical knowledge of people who have key information that is essential to the company.
Shore up your supply chain. As America learned from the 2020-21 pandemic-shutdown and re-opening, supply chain disruptions can suddenly jeopardize a company. No size business escaped the impact, many were damaged while some benefited.
On a less-dramatic scale, companies can make supply chain less risky. For example, a company whose products are manufactured overseas can also develop a secondary supplier in a different country to provide a back-up supply. A good solution is a local American company that can provide products to the company without long overseas supply-lines.
Ensure your insurance. The age-old way to protect individual business risk is distribute risk via insurance. The right insurance can help avoid or mitigate the effects of both business and legal problems.
Companies typically have insurance for liabilities and to protect the hard assets. Business insurance can also cover actions of officers and owners related to the business and cover economic losses due to business interruption. It is important to find an insurance broker with specific experience in your industry. A good broker will advise of other risk insurance that your company may need.
Protect value of intellectual property. The company’s name and logo may represent an important asset. Find out if your name and other identification is correctly registered with your state. You can also file a “DBA” for a “doing business as” name different from the legal one.
Some companies invest significantly in additional intellectual property. Anything written by employees of the company can be copyrighted simply by putting the little (C) mark at the bottom of the document. This can defend against someone using those materials without your permission. If you believe that your products or processes have patent potential, speak to an attorney about the process and cost to file a patent. You may talk with an attorney about the value of “TM” and registered trademark.
Evaluate the business’s legal structure. Incorporating the business is a fundamental way to separate business risk from personal exposure. If you are operating as a sole proprietor, speak to an attorney about the legal protection afforded by incorporating as a Subchapter-S or LLC (limited liability Company).
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Want to learn more about managing your business? At the North Idaho College Small Business Development Center, our mission is to help your business thrive and grow. Risk reduction is just one aspect of fulfilling that mission. No cost, one-on-one coaching in Leadership Development, Strategic Planning, Budgeting, Digital Marketing, e-Commerce, and other tools are available to take your business to the next level. Contact the NISBDC at 208-665-5085 or NISBDC.com.
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John Hammett is a business coach at the Small Business Development Center located on the North Idaho College campus.