Managing business finances is a tricky operation; it’s the area of management which probably has the most pitfalls and complexities. The core skills of keeping books, paying wages, invoicing customers and reconciling expenses is relatively straight forward. However hidden underneath all of these activities, which on the surface seem harmless, are serious risks which could ruin an otherwise well-run company.
Below are 3 steps you can take to reduce financial risk in your business or start-up to protect against unexpected costs.
Insurance
Of course, by its very nature insurance is a financial product designed to reduce risk and exposure. Therefore it is no surprise that it’s the first thing covered to protect you against any unexpected financial costs. As a bare minimum you need to have general liability insurance for your business, it protects you against risk from legal issues and lawsuits against your company.
Legal costs can be one of the most expensive for a small business, especially if it involves a claim for compensation. General liability insurance comes in various levels of cover; the most basic covers your legal fees but doesn’t include any actual compensation you may have to pay out. This is of course also the cheapest level of cover.
A more comprehensive policy will also include cover for any monetary compensation you may have to pay out. This is highly recommended, even if it does cost a little more, as a costly compensation claim can put an otherwise healthy business into liquidation.
Leasing Equipment and Vehicles
For a small business outright buying equipment and vehicles is a huge overhead that can be done without. It makes much more sense to pay a smaller monthly fee which includes any maintenance and repairs. That is a much more appealing option than buying equipment on hire purchase, as you still have to pay for repairs this way. And if your hired equipment and machinery has a serious fault which makes it permanently broken, you still have the outstanding balance to pay.
It’s much better to have a single fixed fee per month which you know is the only cost you’re going to have for equipment.
The same principle applies when leasing cars for your business instead of buying. If you include the optional maintenance packages when leasing a new car then all routine repairs and servicing are included. Leasing a car can also have positive impact on the tax you pay, as the VAT on the rentals can be claimed back.
Invoice Factoring
The phrase ‘cash flow is king’ is an often touted as a crucial rule of business. This is especially true when it comes to businesses that depend on a small number of contracts. If a client doesn’t pay you on time it can be the end of a business which is in its early stages.
That is where a factoring company comes into place, a factoring company will pay your invoices when you issue them and then chase the customer/client for the payment independently. There is obviously a commissions which they take, meaning you don’t get the full invoice amount paid to you. But it guarantees that the money comes into your company account within days rather than months (or never).
Factoring is usually a short-term measure used by companies in their infancy, but it can be a very useful tool to reduce financial risk as a startup.
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