Right now, business owners are picking their way through a whole minefield of challenges. Most business owners will, therefore, probably be only too well aware of the potential for insolvency. With that in mind, here are some steps business owners can take to protect their businesses from it.
Incorporate as a limited company
If you’re currently a sole proprietor, it could be sensible to incorporate as a limited company. This means that, under normal circumstances, liabilities will be held by the company. If it does become insolvent, you will not be held personally liable for them. In fact, you will be free to form another company and/or look for employment.
Review your insurance provision
This is particularly important for sole proprietors but it matters for companies too. You need to think carefully about what your potential liabilities are. Then assess how much of them, if any, you could afford to cover out of cash in hand. Then make absolutely sure that you have adequate insurance cover for the rest.
Review your pricing model(s)
Most businesses generally dislike putting up prices even when times are good. They particularly don’t want to do it when times are challenging. Even so, all businesses at least need to cover their costs to survive. Part of this involves making sure everyone is paid fairly for the work they do. This includes business owners.
One potential way to square this circle is to review your pricing model. This isn’t necessarily about directly charging more. It’s about charging more astutely. For example, if you’ve always sold goods using an ad-hoc pricing model, then see if you could implement a subscription model.
You could potentially offer a discount (or other benefit) to customers who subscribe and still benefit overall from the improved and predictable cash flow. You could use this steady income to improve your business process. For example, you might be able to negotiate better deals with your suppliers in exchange for a greater commitment to them.
Review your payment acceptance
Most non-cash payment schemes have some form of consumer-protection scheme. For example, Direct Debits have the Direct Debit Guarantee. Payment cards and ewallets usually run their own claims schemes often known as chargeback schemes.
Make sure you are clear on all the current rules for all the payment methods you accept and are happy that the level of risk is worth the reward. If you’re not, then just stop your acceptance of the scheme.
If you do accept a payment scheme, be sure to follow all of its acceptance guidance to the letter and be prepared to show proof that you have done so. This is often key to avoiding chargebacks and fighting any unfair chargebacks that are made.
Review your credit control
On a similar note, if you offer credit to your customers, make sure you stay on top of it. For clarity, if you offer the option to pay in arrears, you are effectively offering credit, even if you don’t think of it that way.
You might find it helpful to pull payment from your customers rather than have them push it to you. For example, use Direct Debits and/or card-on-file payments and charge your customers on the invoice due date instead of sending it to them and waiting for them to pay it.
You could also try offering a benefit for prompt payment. This doesn’t necessarily have to be a cash discount. It could be entry into a prize draw (for the billing contact) or a donation to charity.
Review how you use your cash
Try to avoid capital expenses. If you need to invest in infrastructure, try to rent, lease or hire instead. Similarly, try to minimise your ongoing overheads. Instead, look for scalable “as-a-service” options. These may be more expensive overall but they can give you much more flexibility to match your expenses to your cash position.
