This isn’t my normal legal/land-law sort of piece. However, in another life I attend networking breakfasts in Leamington Spa, and this piece is based on a talk that I gave there.
I’ve spent over 35 years as a litigation solicitor. This gives you a very jaundiced view of things. People only come to see me when things have gone wrong. So I’m very used to risk – a major part of my work is managing risk. What can I pass on?
All businesses have risk
If you’re an employee you get paid a salary which doesn’t normally depend too precisely on how much money you are making for your employer. But if you are in business you charge your clients/customers/patients fees and you incur expenses such as salaries, rent, and the cost of materials, and the two sides of the equation are only distantly related to each other. If your income is larger than your expenses you make a profit, and if they aren’t you make a loss, and in many businesses the difference is a very thin line. So there is a risk.
It is part of being a business. You can’t eliminate it. You have to recognise it, and then live with it. And do remember there is the world of difference between being good at an activity – say photography – and being able to trade successfully as a photographer. You need many extra skills. Risk management is one of them.
Going into business is risky – but then so is living. We could all avoid the risk of being knocked down by a bus by staying at home all day. But we don’t – we just remember to look both ways for the large red (or blue) things. And the budding photographer can manage his risk by getting his staging checked, having the children chaperoned, and taking lots of pictures so that some of them are what the clients want.
Risk isn’t bad in itself. It’s unmanaged, unrecognised risk that is the problem. You have to have a sense of proportion. You walk a lot closer to the edge of a kerb than you do to the edge of a cliff because the consequences of getting things wrong are so much more serious. So you factor the chances of failure against the consequences of failure and act accordingly.
Of course you don’t always have to take the risks offered. If you don’t like what you see
- avoid the activity. I don’t know much about conveyancing. So I don’t do it, and any that comes my way is sent on to others who know better;
- protect by taking precautions, or undertaking training, or by limiting your potential liabilty by contract, or whatever;
- protect things by insurance, or laying off liability on sub contractors, so you aren’t in the line of fire if things do go wrong.
And remember, risk can be a reason for you to charge a premium price for a tricky job. And if you do enough of something you ought to get pretty good at it, so you have a niche, and are doing things that are well within your comfort-zone. Taming lions doesn’t bother a lion-tamer, although it would certainly bother me.
Risk is good.
Types of risk
It’s essential to recognise & evaluate risk when you see it. At any rate you have to know when there is a problem. As a partner said when I was a trainee in London:
You don’t need to know where the mines are. We have people to tell you that. But you’ve got to know that you’re in a b****y minefield!
A major reason for business failure is not providing for risks properly. If you’re a buy-to-let landlord you have to factor the risk of voids, or the 6-9 months it takes to get an eviction, or changes in the tax on interest, or changes in the law (eg on s21 or the definition of Houses in Multiple Occupation) into your business plan or you will make a lot less than you were expecting, possibly fatally so.
Or say that you are an IT company and allow one customer to account for say 40% of your turnover. You are very vulnerable if their business fails, or is taken over by somebody who doesn’t continue the relationship. We all know to our cost that big and apparently healthy companies can fail – BhS or Austin Reed are only the latest examples. And if they ask you to cut your charges, or give them freebies, you may be unable to resist. Think of farmers, supermarkets, and the price of milk. You have to have your wits about you all the time.
There are two main types of risk – risks of trading, and personal risks – and here are a few examples.
Risks of Trading
- bad debts/insolvent debtors.
- changes in the market -new competitors, changes in fashion, technological breakthroughs.
- changes in cost of fuel, or changes in law or tax.
- unexpected costs of repairs or research, or a court case.
- supply problems.
- employee problems.
- landlord or tenant problems.
- black swans – totally unexpected developments that you could not foresee (like the discovery of black swans in Australia when all the rest of the world’s swans are basically white.)
Do remember that most businesses fail because of cashflow problems, not lack of profits as such.
- illness/death of owner or family, or key workers
- divorce of owner(s) or key workers.
- internal disputes inside company.
- age and succession.
What to do
Before you start research the business thoroughly. The internet is a wonderful tool, as are books, but they are not enough in themselves. Not everything they say is right, and your particular type of work, or location, or skills, may be different. There is no substitute to practical hands-on working as close to your proposed business as possible. But do remember that if you are working with the vendors of the business that they might not be entirely balanced in their view of things. They are unlikely to undervalue their business or its prospects.
Once you have started take as much advice as you can. You don’t need to follow all of it, indeed you’d be a fool if you did. But you ought to consider it. There are a lot a potential places to get advice – colleagues (if you can), contacts in your trade, networking contacts, friends and relations (although they may not know much about your business), formal mentors, formal training courses and qualifications, and professionals – accountants (the key advisor for most small businesses), lawyers, surveyors, IT techies. And pick the right one – ask around, don’t just read their blurb or go for price.
And then take precautions:
- set up your organisation properly. Register with HMRC. Get a partnership agreement, or shareholders’ agreement to avoid internal disagreements. Get employment contracts.
- get terms of business and contracts – either from your trade body or from a lawyer – and use them.
- set up systems, and follow them.
- keep records, and back them up regularly.
- insure against risks that you don’t want to cover yourself.
- talk to banks before you’re in trouble rather than afterwards.
- take up credit references for customers and suppliers – accounts at Companies House can be 2-3 years out of date.
- keep your life/work balance under control.
- don’t fall out with your wife, or business partner. That will really mess things up.
- and don’t fall out with suppliers, or competitors unless completely unavoidable. A bit of good will goes a long way.
If you are in trouble seek help early. All professionals find it so much easier to help you if they are called in before matters are going terminal. They may be able to stop you making things worse.
And manage risk. Do what you are good at, and comfortable with. Get others to do the rest. These can be employees, or sub-contractors, or suppliers, or agents. There will be a cost, but it may be worth it. Alternatively, don’t do it at all – like me and conveyancing. And if you are doing something new, start in a small way and work up with time.
What not to do
Don’t ignore problems, or only address them at the last minute.
But don’t get over-protective either. Don’t lose a good oppertunity by refusing to raise modest amounts of finance for it. Or get wildly over-insured against all possible risks, or spend a disproprtionate amount of time and money on seeking advice (I never said that business choices were easy to make.)
Obviously don’t take wild, unassessed risks. But more importantly don’t let your staff or colleagues do so either – often without realising the nature of the risks they are taking, if they have less experience or expertise than you. Or if you haven’t filled them in about the potential problem.
And don’t get too worried either. If you are sick with worry all the time you ought to be doing something else.
Legal dangers – the realities
There is a lot more to taking people to court than just getting the law right, although that undoubtedly helps. Courts are slow and expensive. Opponents go bust and are unable to pay judgments, or the winner’s costs. A lot of management time has to be put into fighting a case which could more productively be used earning money for your business. Big opponents can be very difficult to deal with, as they can throw vast resources both in cash and in manpower at a problem that you can’t match.
You need to be almost certain to win sometimes for it to be all worthwhile. Because if you are certain to win the other side is certain to lose, and can usually be persuaded to do a deal. The courts are really only just a method of getting the parties round a table to settle things, so the sooner you can convince them of this the easier it will be. And if you have good documentary evidence, created at the same time as the events, then any judge is almost certain to find in your favour, so this is the thing to do. Record, get receipts, take photos, confirm things in writing. Don’t just rely on your memory, and an impressive witness-box manner, because that rarely wins these days.
There is a lot of training out there which can give you useful skills and some of it is essential – if you want to drive an HGV lorry you have to have a licence. And there is genuine expertise and proven techniques in marketing, sales and management, which can be learned, as well as the more classical skills like book-keeping. Look around and pick what suits you.
Obviously keep your technical knowledge up to date. This is what your customer expects and might give you a competitive edge. Things can change very quickly – don’t get left behind.
Books, the internet, trade periodicals and so on can be excellent in showing you the way into a problem, or in keeping an overview on an aspect that you don’t come to very often, or in showing the current trends and interests in your field.
If you need detailed help in a technical area you can go to a professional, for a price. For most small businesses the accountant is the first port of call, and they should be able to direct you to appropriate lawyers or surveyors or whatever if it isn’t their sort of problem.
However, do beware that a lot of “training” is really just a way for the trainer to make a living, rather than being a lot of practical use to you. And some professionals aren’t worth much either.
So, as I said before
Risk is Good.
Or more accurately
Managed, understood, recognised, prepared risk can be good in appropriate circumstances.
But even then, beware of black swans. Such as the referendum leading to Brexit, which nobody expected when my own business was set up a few years ago, and and the long-term result of which is impossible to predict. A definite risk – but perhaps one for another day.