If a customer, or your banker – people who are important to the success of your business came up and asked: “How long will you be in business?” What would you say?
Some of you may answer with the number of years until you retire, which is voluntary. This assumes, of course, that something out of your control does not happen that will cause you to head for the exits sooner than you want.
Let’s assume the latter – how long will you be in business? If you can’t answer, or don’t know where to begin answering that question, you may want to think about formally managing the risk to your business.
What events would cause your business to stop functioning, even partially or for a period of time? What would be the impact of that disruption?
A few possible consequences: loss of profit, customers or clients, even the loss of your business. And don’t forget the employees who depend on the business for their security and livelihood.
Fortunately, there are many reasonable steps you can take to mitigate the effect on your business of unexpected disruptions.
One of the most cost-effective actions you can take to reduce risk is to formally and regularly think about the various ways your business can be damaged, and design a strategy plan to deal with them.
One way to start handling risk is to get together with your employees and trusted advisers to ask them to think of possible disruptive events. Then solicit suggestions about how to minimize or eliminate the impact on the business.
Some common disruptions and possible mitigation’s:
- Natural events: A storm and/or power outage. For companies with retail or warehousing operations, an option to rent another location, or re-routing orders, customers, etc. could minimize downtime. Inventory spoilage may be mitigated by having backup generator may. Alternative communication channels are a must for all businesses.
- Embezzlement: Did you know that a high percentage of embezzlement is perpetrated by long-time employees? The reasons are numerous, but having solid internal controls over cash and valuable inventory are absolutely critical to minimize graft losses.
- Damaged Reputation: Have you heard of business that has been disparaged on social media such as Facebook, LinkedIn, or Yelp? This type of risk is more out of your control, but you can still put in place preventative measures.
How to Combat Negative Social Media
- Devise a set of standard responses to complaints. Ensure every employee knows not to “go off script” and defend the business too vigorously. A well-meaning employee can make a complaint situation worse by posting aggressive or inappropriate comments.
- On social media and in person, regularly ask your customers or clients about their experiences with your company’s offerings. Respond professionally to feedback and complaints. This behavior will communicate to current and potential customers and clients that you listen to them and are willing to do what it takes to satisfy them.
No matter how prepared you are, you may be unable to prevent significant damage to your business from a disruptive event. In these cases, you must react productively.
Reactive measures include business interruption or casualty insurance.
Business interruption coverage is a little like disability insurance. It restores lost income.
Unlike disability insurance, you will need to calculate the lost profit. This can sometimes be a complex and time-consuming exercise. The best way to prepare for this is to analyze your financial statements each month. Look for trends and one-time increases or decreases in profits. Your insurer will likely need you to filter these out to calculate restitution.
Casualty insurance covers losses from theft, fire, disaster, etc.
Do You Have Employees or Contractors?
This seems like a simple question (or maybe not). But the answer has a broad effect on potential tax and legal liability. If independent contractors are found to actually be employees, your business may owe steep penalties. Double the social security and Medicare tax that should have been paid.
This is 30% of the amount paid to those contractors, plus interest.
Despite the risk, there is no easy test or answer as to whether the people who work in your business are one or the other. The IRS uses 20 common law factors to determine status.
If you depend heavily on independent contractors, it may be worth consulting an attorney. In the meantime, there is a “safe harbor” rule that you can use to minimize the risk of tax penalties.
- Classify people doing similar work the same – as either employees or independent contractors
- Consistently file the correct returns: 1099 forms for independent contractors and W-2 forms for employees.
However, for the above rules to reduce your exposure from liability, you must have had a reasonable basis to make these classifications. The applicable law indicates that past judicial rulings, IRS rules and laws, results of past audits, or established industry practices as a potential reasonable basis.
Another critical classification risk: The Department of Labor announced proposed rule changes in 2015 that would include more workers as overtime-eligible. Generally, more office workers would qualify. A conversation with a labor attorney may be a worthwhile investment to manage this risk.