Now is the best time to consider how prepared your business is to face future shocks. Few people predicted Brexit, Covid-19 or war in Europe, but they have all occurred within a few years and at a time when founders are already having to cope with the upheavals of supercharged technological change and a global climate crisis.
So, how do you prepare for the unexpected? The US military long ago adopted the acronym VUCA to help its soldiers be more resilient in the face of the unpredictable. VUCA stands for volatile, uncertain, complex and ambiguous and is a good framework for building resilience. Although the current situation for founders is such that, while the future has always been volatile and uncertain, complexity and ambiguity are far higher.
In the face of tremendously unstable circumstances, what stress tests should business founders be running to check their business’ resilience and preparedness? While each company and industry face their own challenges and threats, here are some general areas all business owners should consider.
- Cash flow
Businesses rarely die due to a lack of profit. Especially if they can keep raising funds and getting investment. What kills firms is a lack of cash. Cash can be a challenge for healthy and profitable businesses. Keep an eye on how cash comes into and goes out of your business. This cash flow is the lifeblood of your business. The situation is somewhat complicated by inflation. When inflation is low or zero, keeping 12 months’ cash in the bank gives comfort and a buffer against the unexpected. When the value of that cash is dropping by 10% a year, it makes less sense to keep so much cash. Regardless of how you handle cash, a robust forecast – produced by an experienced finance director – is an essential stress test. Where are the weak spots or crunch points? What happens if debtor days increase significantly and it takes you longer to get paid? - Debtors
The measure of debtor days is an excellent stress test in itself. What would it mean if key clients extended payment terms by 10, 15 or 30 days? How would it affect cash flow? This matters, because in the event it happens you may need to consider using a debt collection agency or invoice finance or factoring. This is where someone gives you a proportion of an invoice’s value upfront and takes on the debt. This will cost you a slice of the invoice amount, but it may be preferable to get some money in time to keep you solvent. Beware you are handing over the collection of that debt to someone who may not have your good name or reputation as a concern. Always make sure you use a reputable supplier. Having such a facility agreed upfront can be useful, as it gives you time to make a proper assessment and decide on a potential supplier in a calm, rational way. Either way, keeping an eye on debtor days (the average time from invoice to payment) at all times is a good idea. Combine it with your cash flow forecast, making adjustments for when you are likely to receive payment, will give you advance warning of potential problems. - Team members
Despite a recent forecast from the Bank of England about higher unemployment and layoffs across the tech sector, there are still not enough people in the workforce. This means companies wanting to hire are prepared to pay more. Hence people are more likely to be lured away from smaller businesses. Tying people in with equity or options is one idea, but be prepared to lose some good people. Make sure everyone has a decent notice period, to allow for handover. Get your senior management team to identify those most likely to leave and those you really don’t want to lose. Target those on both lists for special focus. And do the same with your senior team. Think what relationships key personnel have and make sure no one owns 100% of any relationship. A well-managed CRM system can help the organisation share knowledge more widely. - Rapid growth
There are some “good stresses” you also need to prepare for, notably the pain of growing too quickly. Often after a recession, firms that have survived the worst of a downturn suddenly find themselves taking lots of orders, as the economy recovers. But this can place a strain on resources and leave businesses struggling to meet commitments. One test to run is asking “what would happen if our workload and orders doubled?”. Could your structures, systems, and finances cope? Building in flexibility, making arrangements with temporary or freelance staff, can help to build in a buffer to allow for any sudden expansion.
Are you, as the founder, or is anyone else in the business critical to all sales or service delivery? If so, find suitable support mechanisms to take away any potential “single point of failure”. - Concentration ratio
This is a simple, but sometimes scary test, for business owners to perform. Most founders know the truth already. It is most relevant to B2B businesses, where contracts are large in size, but small in number. Joel Hopwood, co-founder of the Shopper Media Group, tells of the moment, a few years into growing his business, when the whole thing nearly collapsed because their only client - Sainsbury’s - took the project in-house. Ultimately, he and his co-founder saved the business, but not before several anxious weeks and months. A simple calculation tells you what proportion of your business is currently in the hands of your biggest customer. That concentration ratio needs to be monitored and kept low. There is strength in diversity and numbers. - What about key suppliers?
As above, but for key suppliers crucial to your business or product. Be aware of how dependent you are on these key components or suppliers. If there is only one supplier of a vital component, it puts you at the mercy of their success. If they are also a small business, it may make things more precarious still. Line up alternative suppliers where possible, or consider investing in a stock of components (if finances allow) to allow you to regain some control. Working closely with any such supplier, paying them on time or even early, may help ensure the supply of parts continues. - Employees
Losing key staff is bad (they will be expensive to replace), but it is not the only employee stress to test for. At a time of double-digit inflation and media coverage of the challenges people are facing with the cost of living, staff will expect bigger salary rises. Employers are reporting having to give 10% pay increases or more, with some also offering cost-of-living bonuses. Startups are less likely to be directly affected by industrial action, but employee dissatisfaction with a squeeze in living standards could manifest in other ways. Assuming the job market remains buoyant, many may seek to change jobs and gain from a bump in salary this way. Others may adopt the fashion for so-called “quiet quitting”, deciding to not offer as much effort or energy to their job. Either can be disastrous in a startup, where the energy and enthusiasm of the team is vital. - Another pandemic
Yes, it is possible, maybe even likely. Even if it doesn’t take us by surprise, there is a chance a future pandemic could again require lockdowns to deal with. We’re all more prepared than last time, but we also need to recognise the financial scope for government support is more limited. You may be on your own, this time. How would you cope? Is your business one that barely survives in this type of environment? If you got through the Covid-19 pandemic by the skin of your teeth, do you have some smarter moves to help you cope with the next one? Are your staff able to quickly be up and running from remote locations? You may want people back in the office, but there are advantages in keeping open a route that allows everyone to work remotely with no impact on customers. - An unexpected competitor appears
The UK has had its fill of “disruption” in 2022, but not all disruption involves throwing the common sense baby out with the bathwater. If you’ve created a new category or are thriving by delivering a new product or service there’s a chance someone big might be watching, or reverse engineering your product ready to swoop in with a better offering. When looking for potential threats or risks to your business, a sudden and catastrophic loss of business due to a new, more appealing, better-funded competitor has to be on the list. Are clients tied into your business? Can long-term contracts in exchange for discounts or added value work? It is hard to plan for this type of disruption and innovation, but horizon scanning, joining relevant industry events and other business media can help. Go to industry events and speak to experts in the area. The earlier you know about any such development, the better. - Cyber attack
It’s on every risk register. It’s gone from ‘what happens if’ you’re attacked, to ‘what happens when’ you’re attacked, and on to what to do now you are under attack. Make no mistake, your business is a target all the time. Defence is as strong as its weakest link, so be aware of vulnerabilities across all areas of your business. If you hold any sensitive client data, or deal with sensitive assets of any kind, be doubly aware that bad actors will know what you do and will seek to target that information. Follow simple online safety rules, such as the UK government’s cyber essentials. And remember staff remain a weak point, however well trained and intentioned they are. If they are not trained in the essential elements of cyber risk, it’s a worth investing time and money to get them all up to speed, quickly. There are also reputable former hackers (so called white flag hackers) who run tests to see how secure your systems are. If they can’t get it, good. If they can, they can help you close the loopholes.
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