Sustainable Business/How to lower the risk
Complete the basics
Starting a business is always a risk, so it’s important to make it a calculated risk. Completing the feasibility study to this point will have given you a clear idea of the potential for your business concept.
By this stage we presume you have:
- determined that there’s a sustainable market for your product or service
- analysed your competitors and identified how you can protect your position
- checked that you can afford to set up and run your business
- identified and addressed the compliance issues and the barriers to entry.
This chapter will help you to lower the risk even further by showing you how to:
- build your credibility
- avoid the common pitfalls
- focus on your critical success factors.
From the moment you talk to others about your ideas and plans, people will start forming their opinions of you and your business. If they perceive any risk at all in dealing with you, they may be unwilling to support your business and remain instead with your competitors.
If you want to be taken seriously and create a favourable impression from the outset, make a conscious effort to start building your credibility in these three areas.
- Customers must have confidence in you. This means supplying value for money and proving that you’ll deliver what you say you will. A simple step to building credibility is to gather positive customer feedback as quickly as possible and use this in all your promotional material, including your website. What others say about your business carries more weight than your own claims.
- Suppliers must trust you. Build trust by paying suppliers’ bills on time and showing them you have the experience and ability to represent them well in the marketplace. Then (if they’re well known) ask if you can place their logos on your promotional material to increase customer confidence.
- Lenders and investors need confidence in you. Keep your accounting up to date so that you can quickly produce the financial documents your lenders and investors need. Show you have good business systems in place and that you’re monitoring key performance indicators.
- Knowing what is important to all of your stakeholders and addressing these issues. Open and honest communications are the key to good relationships with all these stakeholders.
Reduce or reverse the risk
Why should a customer take the risk of dealing with a new business? Thinking about the risk of doing business with you from the customer’s point of view demonstrates the power of reversing that risk. For example, a potential customer may worry that:
- your product or service will fail to do what you promise
- the product is not good value for money or may have quality issues
- you may not provide back-up, good service or spare parts
- you don’t have enough experience to complete a project or contract.
Take some time now to list all the risks a customer might face. Then, for each risk, come up with a way to reduce the risk or reverse the risk. For example, can you guarantee your product? Guarantees are an effective risk-lowering tactic, especially if you can come up with a better guarantee than your competitors’.
See Template 18 (Reducing the risk)
Here are some further ways to build credibility:
- Always be professional. You never know who could be a potential investor, customer or supplier, so behave like a credible business owner wherever you are.
- Be consistent. Review your customer research – where does your target customer place you in the marketplace? Ensure your image is aligned with your positioning.
- Leverage your experience and profile. Can you gain leverage from your (or your staff’s) past experience and career profile? Promote the details in your marketing.
- Choose your associates wisely. If possible, use recognised suppliers and partners, and refer to them in your promotional and marketing material. Ensure your accountant, lawyer and other advisors are respected business professionals.
Associate with the ‘right’ people
Your credibility can be at risk through others. Make sure that you choose the right people to be associated with. The first business that you encounter may not necessarily be the best. If you have any doubts, ask to talk to some of its existing customers.
Avoid the common pitfalls
There will always be risks associated with running a business. Identifying and managing some of the common risks in advance can help to strengthen your chances of success.
Common pitfalls include:
- Running out of cash. Avoid this pitfall by preparing regular cash flow forecasts and implementing sound business systems, especially around credit management and debt collection. Remember that simply being good at what you do is not enough; you also need to manage your business competently. Get help from your accountant to identify the key performance indicators you need to monitor.
- Failing to seek professional advice. Starting a business can be a lonely experience, but it’s neither necessary nor advisable to make all decisions on your own. Successful business people consult their advisors regularly.
- Failing to prepare for mishaps The unexpected will happen, so ensure you have appropriate insurance and other cover for emergencies.
- Neglecting your own health and wellbeing. Starting a business can be very stressful, especially in the first years. Make sure you look after yourself as well as your business.
- Falling behind. It’s important to keep up to date with economic and market trends, what your competitors are doing and the latest technology.
Plan for the unexpected
Think about anything and everything that could possibly go wrong in your business.
Re-examine and review the assumptions you’ve made so far during your feasibility study. Can you see any financial, compliance or operational risks that you’ve previously overlooked?
Some of the risks may seem a little extreme, but try running through a few ‘what if?’ scenarios, and consider the after-effects of these possible situations.
For example, could your new business survive if:
- a fire destroyed part or all of your premises?
- your computer were attacked by a virus?
- a key piece of machinery failed and would take at least a month to repair?
- your staff all went down with a virus and were off work for a week?
Brainstorm with friends and advisors some ‘what if?’ possibilities and ways you might deal with them.
Your own health and wellbeing
Setting up and establishing a business is hard work. It’s potentially all-consuming, especially in the early stages, so it’s important that you’re passionate about what you’re doing. Some tips:
- Get the support of your family and friends and schedule regular time off.
- Accept that you’ll have to do many ‘boring’ routine tasks yourself – especially in the early days.
- Avoid the mistake of thinking you’re superhuman and that pure enthusiasm will carry you through. Nobody can consistently work 80 hours per week without serious consequences.
- To avoid isolation and burn-out, make sure that you have good support networks (business and personal) in place.
- Maintain your own professional development. Join professional or industry associations and attend relevant workshops to keep your own skills and knowledge up to date.
This must be set against your goals of income and hours you want to put into your business. While all businesses go through patches of difficulty and times of long work hours an annual evaluation affords the time for reflection on what you (the owner) is getting from your business.
Join business networks
Join a local business network or organisation such as the Chamber of Commerce or the Sustainable Business Network (SBN) - [www.sustainable.org.nz]. You can learn a lot from other members, plus receive up-to-date information and attend workshops on a range of topics.
Develop your business and management skills
Designed to support small business owners and delivered throughout New Zealand by local providers, NZTE’s Enterprise Training Programme offers a range of workshops that will help you to develop your business and management skills once you’re trading. Phone 0800 424 946 to find your nearest provider or visit NZTE’s website.
Critical success factors
It’s important to identify then focus on the factors critical to the success of your particular business. They can be industry or business based.
For example, industry-based critical success factors could be:
- retail – location and foot traffic
- manufacturing – production and distribution channels
- service – knowledge and credibility
- tourism – location and visitor experience
- agriculture – production and distribution.
Business-based critical success factors could include:
- volume – the number of phone calls you receive, the number of sales leads generated or the number of people coming through your door
- speed of service – the efficiency of your staff and/or equipment or database systems
- quality – consistent product standards or friendly service.
Which of these factors will be critical to your success?
See Template 20 (Critical success factors)
Finally, here are some critical factors for any business that are worth mentioning again:
Poor financial systems and procedures can be a major pitfall. There are steps you can take to lower the risk of financial difficulties.
- Keep your records up to date and monitor your key performance indicators. Pay particular attention to cash flow.
- Avoid giving excess credit and collect debts promptly.
- Avoid overextending your business (trading beyond your financial limits).
- Avoid overstocking: money tied up in stock is unproductive.
- Avoid under-pricing or discounting. Periodically check your costing and pricing.
- Resist requests from friends and family to provide goods or services at a discount or for free.
- Ask suppliers if you can buy on consignment (only pay for the goods once you’ve sold them).
- Build good relationships with suppliers so you can ask them for extended credit terms if you face a cash crunch.
Changes in the marketplace
Keep your eye on what’s happening in the marketplace. This needs to be done on a regular basis. Failing to keep up to date with current trends can expose you to unnecessary risks such as:
- unforeseen changes in domestic or overseas regulations, which may affect your channels to market
- rapid technological advancements, which may raise customer expectations around service delivery
- your ‘expertise’, which may be surpassed by others.
Being well informed reduces the risk of unwelcome surprises and gives you a better opportunity to develop any necessary contingency plans.
Lower the risk checklist
When you’re in business, it makes sense to lower the risk to all involved as much as possible. To make sure that you’ve considered ways to minimise your risks effectively, take these steps before making your final assessment.
:Plan tactics to build your credibility.
:Identify ways to reduce or reverse the risk to the customer.
:Consider ways to avoid major pitfalls.
:Identify critical success factors for your business.
Congratulations on completing your feasibility study. If you’ve persevered to this point and worked through all the steps in this feasibility study, it’s likely that you have a feasible business idea.
If you’ve now determined that your business idea is worth pursuing, you’ll need to start planning how you’re going to make everything happen.
Good luck with your business.