In today's blog, you will learn why and how to create a safety net for your business.
Entrepreneurs are notoriously overly optimistic.
We don’t generally anticipate challenges like stagnant growth or a lack of a consistent upward trend on the chart or graph. One crucial factor that can improve your sleep quality is knowing you have a contingency plan in place, just in case things don’t go as planned.
Today’s post may prompt you to re-evaluate your business management approach.
So, let’s get into it.
Economies fluctuate, and markets change rapidly.
So, how can you ensure your business can withstand these fluctuations and have a backup plan, a system, or something to rely on when growth isn’t constant?
Specifically, what happens if you have a bad month, a bad quarter, or a bad year? Does that mean the end of your business?
That shouldn’t be the case. You should have a safety net that activates and saves your business and prevents financial ruin.
I decided to put this blog together because recently I’ve heard numerous clients, entrepreneurs like you, express their struggles with running a business, the uncertainties it entails, and the impact of market fluctuations, whether it’s a market crash, a pandemic, or even a war in certain regions.
These factors can have a lasting effect on economies, markets, and businesses, making it difficult to predict the duration of these downturns.
When COVID-19 first emerged, people believed it would be resolved within a few months. However, as we’ve progressed into the second year, it’s evident that the impact on our lives and businesses is still uncertain. So, what do you do when the inevitable happens?
Of course, we must acknowledge the inevitability of change. The only consistent in life is change. The business environment and market will undergo transformations. One of the best ways to prepare for this is to ensure you have healthy profit margins.
I understand this may seem obvious, but it’s merely the initial step. It’ll help you feel more secure. You should be building a financial cushion for your business. This isn’t just for emergencies; it provides a safety net, allowing you to pivot and reinvent yourself if needed.
In our business, we call this the rainy day fund.
Initially we saved 3 months running costs from our profits, then as the business grew we saved 6 months, then 9 and then 12. Now we have reserves covering the business running costs for the next 3 years if we sold nothing. This money is banked, not touched, earning interest and there when we need it. We will never dip below 12 months business running costs because we want to secure the business and the team we support. This is our safety net.
That’s why Apple is so powerful. They have over £200 billion in cash reserves. Why don’t they reinvest it to make more money, build more products, and hire more people?
Apple understands this rule: you need a safety net. Even they’re not immune to potential challenges.
Now, I don’t expect you to have £245 billion in the bank, but aiming for healthier margins increases your chances of having some cash reserves. If you’re self-funded, a 2:1 ratio should be your minimum. For every pound you spend, aim to make twice as much. At the end of the month, you should have twice as much money as you spent, equivalent to the leftover cash you can save in the bank.
Of course, this will be counted as profit when tax time comes. However, your corporate tax will be significantly lower than your income tax if you simply pocket the money. Having cash reserves isn’t just beneficial for when you need to create a new product, pivot, or change; it also provides a surplus, making lenders more likely to offer you a line of credit that extends your runway and increases your chances of reinvestment.
As we say, money is the lifeblood of any business; the more of an extra reserve tank you have, the better things can go no matter what happens.
So, you must plan for rainy days, months, or even years. Sometimes, a business can experience a slump and then recover. It could be due to market fluctuations, ongoing research and technological limitations, or damage to the brand that requires time to repair. These are the financial implications.
Secondly for business safety nets we need to consider of challenges the business could face.
There are other liabilities in your business that you may not be aware of, such as the people you work with and the people you hire. What’s your safety net when it comes to them?
What’s your backup plan if your top performing staff leave or retire? You can’t panic or let the business stop functioning normally because someone’s leaving.
This is why systems are crucial in a business. When you’re building a business, you’re essentially creating a set of systems and processes. You want to document these systems in what we call Standard Operating Procedures (SOPs). SOPs are essentially documents that provide step-by-step instructions on how to perform every task in your business. The person responsible for each role, creates an SOP for their job. You should these in your business from day one really, as you hire these are then passed onto the person carrying out the role.
SOP’s should be review at least once a month at the start of your business and then quarterly as your business becomes established. The SOP’s should be reviewed by the people carrying out the work and the management person or people of that role to ensure everything is captured and improved where possible to deliver the best possible outcome for both the customer and the business. SOP’s can be the saving grace of your business but also allow you to scale to unimaginable lengths within your business.
This is a valuable asset for your business. It ensures that everyone can work comfortably and efficiently. Why?
Because, for instance, if someone leaves your business, you have a playbook to guide a new employee. It outlines how to do their job, what was done before, and what their predecessor was responsible for. This way, everyone can continue to work effectively even when there are changes in the team.
By building systems and SOPs in your business, you create a layer of safety that protects against unexpected events. And remember, something will happen eventually.
People will leave your business, it’s simply the nature of employment. People move on.
SOP’s will become a valuable asset in your business if and when you come to sell it.
Next, ensure you have back-up for your critical tools within your business.
You don’t necessarily need to purchase these tools, but you should research and know what’s available to ensure business continuity. This way, if you need to switch, you have a clear idea of your backup options.
List your backup tools, including website servers, domain name registrars, and payment processors.
If you need to make changes or swap out tools, have a list of trusted vendors ready. This simplifies the process and eliminates the need for further research which consumes more time and money.
When it’s time to make the switch, you’ll be well-prepared and confident.
Remember, this blog isn’t designed to scare you or cause unnecessary worry. It’s designed to give you peace of mind, knowing that you have a plan and can handle changes effectively.
You’re doing great. As your business grows, hires more people, and makes more money, this becomes increasingly crucial. With higher stakes, the chances of losing things, talent, money, or even opportunities increases as well.
So, instead of ignoring this reality, acknowledge that it’s inevitable. Some of these challenges will occur. Your goal is to have a well-thought-out plan of action to guide you through these situations.
Planning for change, even critical situations or disasters, isn’t pessimistic; it’s thorough.
It’s being responsible and understanding that you love your business and want to ensure its continued success, regardless of what happening in the world.
Got a burning question? Reach out on our social channels or email michael@purpleyak.co.uk
Thank you for reading; I’ll see you on the next one!
See you then. Take care.
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