Whether you’re an entrepreneur yourself, or you simply watch the BBC’s Dragons Den from time to time, you’ll be aware of how difficult it is to start a UK business.
This isn’t a UK problem. In fact, many people agree that it’s easiest to do business in the UK than in most countries around the world. According to the World Bank’s ranking of the ease of doing business in 2021, the UK is ranked eighth.
The root cause of the struggle for profitability is that in a competitive market economy, healthy profits will rarely be low-hanging fruit.
You’ll always have to fight tooth and nail to build a profitable enterprise because many other motivated businesses will be running a similar operation, chasing the same customers and trying to hire the same staff. This competition forces down sales prices and drives up costs, resulting in many businesses hanging in a precarious balance between profitability and unprofitability.
This is the economic reality of founding your own company and going out on your own into the world of business. In this article, we’ll introduce a piece of sage advice that will help you navigate this hostile terrain with a cool business head.
The nature of risk in business
Entrepreneurs need to take risks to succeed. From taking on a long-term lease, or hiring a salaried employee, business leaders begin taking on financial risks from day one of founding their business.
The ultimate risk for any business is that it is sent spiralling into bankruptcy by an unforeseen and sudden cost that it cannot afford to bear.
When a business owner hires a member of staff for £30,000 per year, it’s because they have calculated that they can generate £60,000 of value from the output of that individual. When a manager opens a new store with an annual lease payment of £18,000, they sign on the dotted line because they believe the additional revenue will cover this lease payment and all other costs of running the store.
Each business decision is taken with the expectation that in all likelihood, the upside will outweigh the downside.
Not all risks are created equally
We are taught that in business, risks produce rewards. This is not the case with all types of risks.
You may now be able to see the difference between productive and calculated risks, and the systemic risks posed by a legal claim from a member of the public, a health & safety disaster, flooding, fire or criminal activity. These risks come with no possible upside to the owner.
There is no economic case for bearing the risk at all. Yet business owners cannot control or eliminate these risks entirely. Things will always go wrong.
Protect your interests directly with business protection policies
That’s why savvy business owners recognise that these risks are not worth taking and pay for an insurance policy such as public liability and general business insurance to offset the costs of any of these unlikely possibilities.
This allows the business owner to focus on maximising the value they receive from their investments and the calculated financial risks they have taken, which will propel the success of the business in the future.