Mitigating Income Risk

This post was published more than 31 months ago. Due to the rapidly changing nature of business and taxation, some concepts may no longer be applicable

There is no denying that many retail businesses have experienced significant challenges over the past decade with the rise of low-margin, low-cost online businesses. The need to adjust costs and offer innovation in client service to meet the challenge of online competition has become an ongoing area of focus to stay profitable.

There is another area of potential vulnerability for all businesses, especially those in the corporate sales space; managing the risk of being reliant on a small number of large clients.

On a number of occasions, I have seen agents lose a large corporate client resulting in those agents losing a significant amount of income and being forced into administration and liquidation. Certainly not a good outcome. You don’t always have control over when your clients seek your service but you do control when and where you spend money.

Any business with income reliant on a limited number of clients, and clients that have the ability to move to another supplier relatively easily, must ensure that they can operate without that income. The simple solution is to keep your overheads as flexible as possible to allow your business to scale up and down as quickly as necessary.

There are usually 3 main overheads that should be monitored by most businesses; staffing costs, rent and occupancy costs and office IT systems.

Staffing costs pose their challenges with a need to balance between full- and part-time direct employees and contractors. Direct employees offer greater control for the employer but adding employees in times of growth may necessitate their redundancy when there is a significant loss of income. Staff redundancy has implications not only for the employee being made redundant but also for the remaining employees and their feeling of job security and office culture generally. Using contractors may seem like providing a convenient way to scale back staffing costs when necessary but also restrict the control over the work they do.

Rent and occupancy costs are a challenge between a long office lease offering security and a shorter lease offering greater flexibility to move to larger or smaller premises as the business grows or shrinks. Every business needs sufficient office space in terms of location and size to best serve clients while at the same time ensuring that their leasing and fit-out commitments are flexible. One often overlooked solution to keeping rent and occupancy costs low is to encourage staff and contractors to work from home and use shared office facilities that may be less costly than having permanent facilities that are often under-utilised.

Cloud based office IT systems offer huge potential for savings compared to on-premises systems that may have been state of the art less than 5 years ago. The biggest benefit to any cloud based system is the ease with which a business can scale up and down its use of the systems in response to changes in demand. Quite often it makes financial sense to scrap existing on-premises systems, even those that may still be operational, for cloud based systems with lower ongoing maintenance costs. Cloud based systems will often not have any upfront costs apart from migration of existing data and some training. Cloud based IT systems also offer greater ease for staff and contractors to work at home or form clients premises as appropriate.

There is no magic solution to avoid risk and every decision has challenges and consequences. You, as a business owner, need to consider and review your business practices to ensure that you can handle what happens in your business and that your business remains as flexible and adaptable as possible to meet the challenges it will face.

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