Simple Steps to Reduce Risk

Posted: January 18, 1999 by Sutton Landry in Operations, Planning, Startup

Classic Cincinnati Post column from 1999

Circus analogies are often used to describe what it’s like being a small-business owner. The juggler, the plate twirler, and the high-wire walker are among those analogies most commonly used.

Of these, the high-wire walker, the solo artist working high above the crowd without a net, whose each and every step is fraught with danger, is the most accurate analogy of all. But it doesn’t have to be.

Small-business owners often ignore the kinds of things that can help minimize and manage the risks of operating their businesses. They assume that they have to work without a net, when in fact, they can take some simple steps that will protect them, their families, and their businesses from many of the most common hazards.

Protect yourself and your family with insurance. Not just health and life insurance, which are certainly important, but disability insurance.

Every year I meet at least one individual whose business has been severely affected because of a prolonged illness or an injury. Depending on what state your business is located in, as a business owner, you may not be eligible for workers’ compensation coverage. In any event, you should acquire long-term disability insurance from a private carrier.

Build a business cash reserve. Small businesses are inherently vulnerable to all kinds of economic shocks, from highway construction projects that limit customer access to slow-paying accounts.

Even the very best small businesses that I have worked with at NKU have had to survive at least one major external crisis in any 10-year period. A healthy balance sheet with adequate cash reserves is a key factor in such situations. Start with a modest goal on the order of 15 days worth of operating capital and build your cash reserve.

Build a solid banking relationship. In fact, build two banking relationships. Be sure that you know, really know, the branch manager and a commercial loan officer at your current bank and that they know you and understand your business.

The better your relationship is, the easier it will be for you to borrow the next time you need to.

By the same token, recognize that the banking industry is very competitive and is in a constant state of flux. Because the people that you have built a relationship with in the past may not be there when you need them, build a relationship with a second or reserve bank.

Train an operations manager. This could be your spouse, your son, your daughter, or an outsider, but you need to have someone besides yourself available to run the business in case you get ill, hurt or need to tend for someone in your immediate family. Keep multiple sets of key business documents. Remember the Falmouth flood? I certainly do and so do a number of my clients. For years I have preached that every small-business owner should keep a three-ring binder that includes all the key documents for the business. The binder should include: (1) corporate or other legal entity documents; (2) lease or mortgage agreements; (3) loan agreements and documents (especially shareholder notes); (4) a current financial statement; (5) annual financial statements for the past five years; (6) tax returns for the past five years; (7) insurance policies; (8) any and all contracts with suppliers or customers.

If you have all these documents in one binder, then hopefully you can grab it and take it with you in the event of a disaster. But an even better choice is to have multiple copies in different locations.

Finally, implement an internal control and security system. Your goal here is to protect yourself, your customers and your suppliers from potential employee dishonesty. Use pre-numbered purchase orders and invoices and account for all numbers, just as you would with checks. Lock up your checkbook, purchase orders and invoices nightly. Balance the checkbook yourself each month and scan the cancelled checks.

This is especially important if you have an employee writing checks. Review employee authorizations with suppliers, gas stations, etc. You don’t want to be funding your employees’ part-time operations.

By implementing these business practices, you will have dramatically reduced the dangers inherent in running your own business.

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