Starting a company is only half the battle. Keeping it viable is much more challenging. So many problems can knock it out of business. Here are the top 5 risks your small company is exposed to.
Growth in sales is a distinctive feature of a healthy company, large businesses that started out years ago may grow little by little to survive. But for a small entity to stay afloat and even to flourish, revenue needs to increase at a fast speed.
A decrease in sales is a severe symptom that needs to be treated once identified. How? The first answer that comes to mind is by reducing prices. However, that won’t work if you continue to spend the same amount of money on production. Cutting prices should always come alongside cutting the cost of the goods sold. Another way out for a diversified company is to reduce the products or services delivered or select these more carefully. Business costs will favourably drop, but clients are also likely to shift their preferences to competitors once you’ve slowed down your pace.
Operating in the shadows will not bring new clients or stimulate sales.
It’s fine to struggle for customer acceptance through cold calls during the first year in business. But at some point, a business has to start running on its own fuel. If a company has a sound business strategy, customers will eventually start looking for its products. If clients don’t come unless solicited, then it is a signal to big trouble.
Small companies have to market aggressively to survive in the world of business competition. However, marketing efforts may cost a lot. If you can’t budget much for them then turn your clients into promoters. Try introducing a referral program with a reward for drawing friends. One satisfied client can attract 3-4 more. Word-of-mouth advertising is good, online marketing is better. Organise a contest or a workshop and spread the word about the event via Facebook. Use hashtags to make it easier to find.
A good employer is committed to paying salaries regularly and on time. Small businesses, which are more exposed to financial troubles, may face difficulties meeting their payroll. Such situations have to be remedied as soon as possible. Think of designing a viable strategy to increase sales quickly or to cut other expenses.
Some troubles arise from firing employees if done with no due diligence. Such actions may entail both tangible and intangible risks. A wrongfully terminated employee is protected by law. If an employer violates it, he will inevitably suffer legal consequences. The only reasonable way to avoid being sued is to study the laws related to employee rights. However, the affected staff member may also disclose confidential information about the business processes and plans and thus hurts the company’s reputation.
While larger businesses have more chances to overcome difficulties, small-sized enterprises are likely to go bankrupt. High overhead is one of the reasons for cash flow problems. These are expenses that don’t generate revenue directly, including rent, tax, advertising, utilities, etc. Indirect costs have to be regularly audited and reduced if necessary. Another cause of trouble is bad debt, or the money owed to the company. Clients who delay payment terms put your business in danger. Consider monitoring account payables and outstanding invoices every month. Encourage slow-paying client to pay faster or else the consequences will seriously affect your company.
In essence, having a consistent contingency plan is crucial for a small business. Save three to five months of operating expenses in case of cash shortage. Outline the expenses you could reduce and those that can never be cut. Careful money management and reliable accounting can be a lifeline.
Imagine a company having a big client who accounts for over 50% of its revenue. It’s fine when the client pays regularly, but what if payments are always being withheld? In any case, overexposure to a single client, even if they pay on time, is dangerous. If you lose them, you lose the principal source of revenue. Diversification is the basis of strong financial performance. Assess the vulnerabilities of your company. Will you survive if you lose your big client? Unlikely. Expand your client base and the business will be less risky. Start by entering into small contracts; they could eventually turn into your next high-profile customer.
Also, think of expanding your range of services, goods and markets too. Generally, diversified businesses are stronger, healthier and more viable.