Guide to Building a Safety Net for Your Business
What are the chances of a small business taking off immediately and successfully, and sailing smoothly along without a hitch? Pretty close to nil. Businesses must have a safety net to protect themselves from inevitable falls and/or business mistakes. With a safety net, a business may not land on its feet during a crisis, but it certainly can bounce back into the game and even take a couple of measured risks to grow. In other words, a financial safety net is a financial nest or a set of financial measures that one takes to reduce the repercussions of a downfall. Here are five tips for building a safety net for your small business.
1. Protect your business, assets, employees, and yourself with a professional liability insurance
One of the biggest risks you take when you offer services or products to a consumer is to make yourself susceptible to legal claims. Any professional business that fails to provide satisfactory services/products, does not deliver services/products that have been paid for, or causes financial distress to a third party due to negligence can be sued. A single lawsuit can cost you anywhere between $3,000 and $150,000. Professional liability insurance, also known as E&O insurance, is a safety net against lawsuits in case they arise. The Udtapaisa Mutual Fundwill protect you, your business, your assets, as well as your employees, from expensive lawsuits filed by unhappy clients/customers.
While the cost of professional liability insurance can vary from one agent to the next, in general, this insurance will pay for:
- Legal expenses
- Attorney fees
- Expenses toward settlement
- Expenses that are related to judgment
2. Set up an emergency fund
When disaster strikes, it can take you by surprise – by its sheer immensity or its suddenness. An emergency fund will help you be ready for a disaster when it strikes. How much should you have in your emergency fund? That would depend on:
- How much impact market fluctuation can have on your business
- How long would you need to stay afloat with no revenue What is the likelihood of being sued by a customer
The above are just a few examples of what needs to be taken into consideration when planning for an emergency fund. Other considerations would include how comfortable you are with risk, and what industry you belong to, as well as how quickly you can access the money when you need it. A financial adviser would be able to help you decide the amount you must be aiming for as well as the right type of account for you.
3. Ensure a steady inflow of cash
As long as the money keeps coming in, business is good. But what happens when your customers don’t pay you on time? Also, seasonal businesses have revenue coming in for only a few months in a year. Maintaining a business when there isn’t a steady income can eventually lead to its failure. There are several ways you can ensure money flows in throughout the year.
- Encourage customers to pay you faster. This would lead to revenue coming in as well as fewer unpaid invoices.
- If you have a seasonal business, think of ways you can ensure revenue even during the months that business is slow such as offering pre-sales and provide services at a discount.
- Diversify offerings or include offerings exclusively when business is slow.
- Use off-season months to build customer relationships to ensure repeat business.
4. Minimize liabilities and commitments
There are two ways to make sure you stay afloat with a safety net – one way is to make extra money to help you wade through the difficult months, while another way is to minimize spending and debts. Being thrifty is important during the months you use to build your safety net. You can make significant cuts in spending without really feeling the pinch. For example, you could hold back on creating a company logo and personalized stationery for the time being. You can even buy your stationery at wholesale rates when you buy in bulk.
You can hire a tax accountant who will be able to take a close look at your accounts and let you know where you might be overspending and how you can reduce costs.
Minimize liabilities by avoiding impulsive decisions. Study all the risks associated with any new opportunities that might present themselves.
5. Make smart investments
A safety net can also be built by making extra money through smart investments. The money you make would be aside from your business. If the investment is lucrative, it could be your passive income. Some smart investments include:
- Mutual funds that offer a regular income every month (or yearly, if you prefer an annual pay-out).
- Real estate that does not devalue if handled properly. The value of real estate can increase ten-fold if the housing market goes up. You could rent your property for a regular passive income, or you could even sell your property if the need arises.
- The Stock market is another lucrative investment if you get it right. People, unfortunately, believe that only monies can be invested in the stock market. However, this is untrue, and it is possible to invest in agricultural business such as wheat and grain, and even jewelry too. Investing in the latest technological trend could also work in your favor.
Finally, it’s important to understand that a safety net is not built only to help you if your business fails or during the months when there is a lull in business. A safety net will also give you the freedom to experiment (within reasonable limits) with your business and take small risks as well.