10 business safety nets every soloist should put in place
Life as a sole trader is a liberating and, usually, fulfilling one. By striking out on your own, you are freeing yourself of a boss in order to put all of those great ideas of yours into action, free from interference.
But with this freedom comes heightened risk. The official stats show that the fewer employees a business has, the shorter its life expectancy.
As a soloist, you could well be just one significant error away from business failure. Your high wire act needs safety nets in place if your entrepreneurial dreams aren’t to perish.
Luckily, many of the safety barriers between you and complete disaster are common sense measures that shouldn’t cost you the Earth. Find the time to implement the following and you will, hopefully, be able to survive an unexpected downturn.
Here, global serial entrepreneur, educator, author and angel investor Tom McKaskill provides 10 essential tips that every soloist should pay heed to.
1. Have a business plan
Your business plan will be out of date even before it comes off the printer. You will be lucky if anyone reads it and the most likely outcome is that it will gather dust on a shelf somewhere – so why bother?
Even if all this is true (and it probably is), a business plan is one of the most useful documents you will ever produce in an emerging firm.
It is most likely the only time when you take the time to look at the whole business as an integrated system. To be effective, the business plan must coordinate every part of the firm.
The sales volumes are checked against the inventory levels which in turn are validated with manufacturing and then back into procurement. The operational levels are tested against the employment, recruitment and training numbers and so on.
The reason why venture capital firms want a business plan from you is because they want to see that you understand how every part of the business works and can show how it all works together.
They might then dive down into the marketing plan and so on, but they need to see that you understand the implications of changing any part of the plan.
The good thing about putting together the business plan is that you have to dig into every part of the business and produce a plan for each part which is integrated into every other part of the business. One of the major benefits is the insight you get into the firm itself.
You will uncover problems which need to be fixed and will discover risks which need to be addressed. This is why it is better to write the business plan yourself than have a consultant do it for you. The exercise is well worth the time and effort.
2. Document your processes
One of the major problems of selling services is that the customer can’t see and touch what they are about to buy. They often see the purchase as an act of faith. Because of this, their perceived risk is usually quite high.
What we need to do as the vendor is to find ways in which we can provide greater certainty about what is being sold.
We need to provide greater clarity and certainty around the outcomes which will come from the purchase and work to substantially reduce the perceived risk.
We can achieve a lot through documented case studies and testimonials. If I can see or hear the outcomes which other customers have achieved, I can have a greater degree of confidence about what I am about to commit to.
However, many intangibles are highly customized during the delivery process and so the precise outcome is not known at the outset.
In this situation, the process which is used to deliver the service is critical.
A well-documented process which allows the customer to see how you will undertake the activity can often allay their concerns.
This is especially effective if the process is broken down into stages with each stage having its own planning and review components.
Instead of seeing a long-term commitment with uncertain outcomes, the customer can see incremental outcomes over which they have some influence.
3. Obtain the best advice
There are many risks to manage in a business and the last thing you can afford is to be exposed because you failed to address a problem correctly or to ensure you had adequate protection in an agreement. Basically, if you pay peanuts for advice you will get monkeys doing the work for you.
The difference between smart advisors and very ordinary ones is not just a few percentage points, it is counted in multiples.
Really smart people pay for themselves over and over again. It is worth taking the time to track them down and ask them to do work for you.
You can tell the difference immediately. They ask different questions. Their questions are insightful, penetrating, challenging and often uncomfortable as they expose your own lack of preparation.
They think about your business first and the problem you are trying to solve rather than giving you an off-the-shelf solution.
Whatever extra they might cost is recouped many times over in the difference they make to your business.
4. Wait until the money is in the bank
You could count on more than a few fingers – maybe even several hands – the number of times I thought I had a deal closed and signed to not have the cash turn up.
Given that my business was large-scale projects; that is quite a lot. What I learned to do was to keep chasing even after the contract was signed.
However, if they don’t pay, you are left fighting in court for the money, which is perhaps not a great way to spend your day.
So you end up walking away. But the lesson is obvious. Even when you have a signed contract, until the money turns up in the bank, you don’t have a deal.
The lesson which follows from this is that you should never spend the money until it is in your bank. Further, be careful how much resource you commit to the customer until you see proof of payment.
If they are not paying on time, be careful how long you leave it before holding back on delivery. If you get too far into a project without seeing the money, you may end up writing off whatever you have invested when they don’t pay.
If they become insolvent, your chances of recovery of your debt may be very slim, especially if you have failed to fully document and have signed off what you have delivered to date.
5. Be accountable to a board
It is very easy in business when you are the founder, president or owner to become complacent and make decisions on the fly because you cannot bother to explain or justify your decisions – because you have the authority to do what you like.
Big mistake! We all need the discipline of explaining what we are doing and why to someone.
It is important to have a reason to think things through carefully, consider all options and control the knee-jerk reactions. Being accountable for your decisions and actions, even when you don’t have to be, is a very worthwhile discipline to develop in business.
If you can’t explain why you are doing something to an intelligent and industry knowledgeable individual, you should take a step back and rethink your decision.
Whether you have a formal board of directors or an informal coach, the discipline of thinking through the decision and how you will present it to gain approval and support is a very useful mode of operating.
Consider that if it is the right decision you should gain support from them. If you can’t convince your board or your coach, are you really sure you are making the right decision?
At the end of the day, it may well be your judgement call, but it is worth gaining the feedback to ensure you have thought it through carefully.
Story continues on page 2. Please click below.
6. Plan for the worst case
Every entrepreneur I have talked to has told me stories of things which have gone wrong: missed deadlines, cancelled orders, payments not being received, employees leaving at critical times, people getting ill, new competitors and so on.
Even a great business won’t be immune to problems and those that are not planned for can do real damage to the business.
What you need to do is to test various scenarios to ensure you know what decisions you would make in the event of a serious problem.
Once we understand the worst case, we can put in place strategies to cope, mitigate, avoid or respond.
It is not that this becomes the business plan, we should still plan for what we realistically expect, but we should have fall-back strategies in case things go wrong.
In preparation, we might arrange additional funding sources, cross-train staff, plan for succession, have back-up plans for generating income, plan to delay discretionary expenses and so on.
Understanding where the risks are and what tactics can be employed is the smart way to cope with future problems.
7. Keep the bank informed
Banks are not in the risk business. The margin they have between the rate of interest they pay on deposits and what they charge on lending is often as low as 2%.
It takes a lot of banking business to recover from a bad debt. That being the case, you can’t expect them to support you if they don’t know what is happening in your business and they have no basis on which to make a judgement about your ability to manage through a dip in revenue.
They are not your friend and they are not a shareholder in your business, but they are a supplier and an essential one at that.
Banks will react quickly if they think their money is at risk. They have been known to seize money in accounts just at the time you are about to pay payroll or your suppliers.
Basically, if you don’t keep them up to date and provide them with a view of your future business, you can’t blame them for overreacting.
They need to know about your business and the manner in which you tackle problems.
The earlier you can inform them of a problem situation and show them how you will manage through, the greater the chances you will have their support.
They also do not want to meet you when you have an immediate problem. You need to update them on a regular basis and show you can manage good times and bad.
8. Build recurring revenue
The first objective of any business is to survive, so strategies which improve business resilience have to be high on the agenda.
We only get to do the interesting things in our business if we last long enough to have the time and resources to do them.
One of the most successful strategies to create resilience is to build up the level of recurring revenue in the business.
By recurring revenue I mean revenue which the firm can rely on even in an economic downturn. You should review how you can implement long-term customer agreements, loyalty schemes, customer engagement activities, customer entanglement strategies and on.
Develop products and services which sell back into the existing customer base such as maintenance, auditing, training, accessories, upgrades and so on.
You need to create reasons why your customers need to come back for additional products or services.
Creating good customer experiences can also improve the resilience of the business if it results in repeat sales or a high level of referrals.
A healthy business might aim to have 50% of its business from its current customers. This provides a solid buffer for economic downturns or new competitors entering the sector.
9. Have your business audited
Can you really be sure that you have done everything you need to do to meet all your compliance requirements?
Can you be sure there are no errors in your systems which are misleading you or that proper authority has been applied to all the expenses?
It would be a rare entrepreneur who claimed he knew enough about his business and about the legal obligations to state that he wouldn’t benefit from a proper independent inspection by experts.
Apart from making sure the systems are working correctly, the compliance obligations met and any serious errors detected, there is a great deal of comfort to the entrepreneur in having an independent audit. In a way, it is a method of being accountable to yourself.
You want to know that you have done the job correctly, you have not overlooked something important and your systems are operating correctly.
You also want the advice which comes with the audit on how you could improve your systems.
It is important to know that you have your accounting and other governance information up to date if you need a loan or wish to entice an investor into the business.
This is something you cannot leave to the last minute.
10. Measure customer satisfaction
You need to ask your customers what they think about your products and services. The key to high growth is satisfied customers.
This results in repeat sales, referrals, a positive reputation and employees who are appreciated and therefore more productive as a result. But this shouldn’t be guesswork.
You need to actually make the effort to periodically check with your customers to ensure you are meeting their requirements.
It is very easy for a company to become complacent and gradually lose its way through over confidence. Every now and then you need to collect the evidence to show you are on track.
What you will find is that not everything is being done correctly. There will always be situations which were not performed well, customers who did not have the best experience or products which did not quite live up to their reputation.
The key is to find out so you can do something about it. On the other hand, positive feedback can be shared across the organisation.
Employees like to know they are doing well, especially in the eyes of their customers.
You can also use customer surveys to find out how you could further improve your products and services and what else you could do which they would value.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.