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Hidden Hazards for small businesses

Starting your own business is exciting, frightening, rewarding and dangerous.
But you have to do it! Life as someone else’s employee is now in your review mirror. You know you will have to commit totally to this new endeavour and forget things like spare time and hobbies for now. What you can’t achieve during the day must be done at nights and weekends. Put overtime pay completely out of your mind; there is no such thing when you are your own boss.

I have been there, done that and learnt a few lessons along the way – some of them very painfully.

Big Customers

We all want them! You save money because once you have captured one as a client, they don’t cost as much to retain. Hopefully, they keep feeding business to you with little effort except to do an excellent job for them every time. However, once a particular client represents a significant portion of your business, watch out!
A big customer for you is probably a large business itself, but they are subject to internal upheavals over which you have no knowledge or control.
Here are a few:

  • I don’t have room for you in next year’s budget!
  • We decided to take your work in-house
  • Next year, we need the same thing from you but costing 10% less
  • Sorry, we are moving this work to China
  • We have given this to your competitor because he will do it for 25% less
  • And so on.

For them, this is a short, quick conversation: for you, it can be devastating!
The lesson here is, don’t base your business on a small number of big clients if you can help it. If possible, try to avoid having all clients from the same industry. The broader your client base, both across sectors and individual businesses, the more secure you will be.

Unexpected Cash demands

Blog 1 discusses some aspects of how important cash is to any business. Here are two different aspects of cash management that you might not have considered:

  1. Taxes. When you send an invoice, most clients don’t pay right away. A client of mine was a motor manufacturer, and their policy was to pay all invoices on the last day of the month following the date they received it. So, you wouldn’t get paid for up to 90 days after you provided the service or delivered the product. However, the VAT levied on the invoice must be paid to the Government on their deadline.  They don’t care if you haven’t received the cash; they want their money, and they want it now! So, a cashflow problem for you. The same thing goes for when you file your business tax return. You have to be able to stump up the cash when they demand it.
  2. Growth in your own business. Growing businesses are always cash hungry. Early sales calls can be unproductive until you build a reputation and establish a track record. It is an axiom that rapid growth quickly consumes cash.  Hiring people is very expensive; they are unproductive until they learn the ropes; and you need to have them kitted out with phones, desks, laptops, perhaps even vehicles for salespersons.

Something you might consider for slow-paying, but significant customers, is factoring. This approach could be prohibitively expensive for small businesses as customers. Invoices from a big, well known and financially sound clients, can be factored relatively inexpensively. So, you get most of your cash immediately rather than having to wait. Think of it as a payday loan for business.

Hiring employees

Hiring your first employee is like stepping in quicksand unless you go about it the right way! It is so easy to be so excited about this milestone that you forget to do the paperwork. Once someone moves from the status of ‘friend’ to employee, your relationship fundamentally changes. As a friend, you may not mind if they turn up late for something. But business runs on schedules and deadlines. As their boss, you need to be able to make rules and enforce discipline, such as timekeeping.  It is in both of your interests to have an employment agreement that both of you must sign. You can find sample contracts on the Internet, so don’t feel you have to invent one by yourself. It must include how you calculate their wages and when you will pay them, hours of work, benefits, standards of conduct, duties, holiday and sick day procedures and entitlements, notice period and redundancy rights.

Hiring Relatives

My best advice is, don’t do it! Managing a friend can be stressful enough if they aren’t performing to your expectations – turning up late for work, taking unapproved time off, talking back, checking social media and personal phone calls while at work, being over-familiar, and so forth. But when the employee is also a relative, things can get even worse, especially if things get so bad you need to terminate the relative. Then other relatives will take sides, and suddenly you have a family dispute that can get completely out of proportion.