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Tradesman Business Advice: Covering Financial Risk

Mahia

As a small business owner, your finances are the key to understanding your business. Making sure you understand how they can negatively effect your business is one of the keys to success. The main two financial risks that you must to cover in the financial side of your business are liquidity and credit.

Liquidity Risk:

 

This is the cash coming in and out of the firm (or lack of it).

A question you should ask yourself to assess liquidity risk is “Does the business have enough funds to pay its debts as they fall due?”

Not getting paid can be devastating to the business. This is a very real risk, especially when working as a subcontractor and your principal contractor fails.

It could mean your business failing or even the chances of getting a loan being drastically reduced.

To make sure you remain unaffected by liquidity risk there are a number of things you can do:

Cashflow forecasting

Knowing when you need to make payments, along with when cash will come in is important. Xero is great for this.

Another good one is getting people to pay you quicker by regularly contacting them and reminding them to hurry up. (You can even automate this in Xero!)

Credit risk:

 

Alongside the risk of larger collapses, a single customer failing to pay can really screw with you. This is known as credit risk, and covers everything sold on credit – like when you performed a service before getting paid.

Some things you can do to ensure you don’t get dicked around by financial risk:

  • Checking the credit status of the customer before doing the job
  • Checking publicly available registers to make sure that the business you are dealing with is in fact real
  • Making sure your customers sign the contract terms before you do the job
  • Maintaining strong relationships with people who owe you money so you know their current liquidity status

Reminding the f*ckers that need to pay you is extremely important, along with being notified when they forget so you can chase them up immediately. The accounting system Xero will help do this for you. Check out our article on why you should use Xero here.

Making sure you don’t fail financially:

Contract terms

These are really important, and can protect you if you go to court. Have a look at some trade associations that have contracts set out for you.

Regular financial reviews

With an accountant and a modern accounting system, monthly reviews of financial health are doable for even the smallest building businesses.

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