Most importantly, self employment is a risky business, but what in life is risk free ?
Certainly, a great number of individuals dream and think about being self-employed, your own boss, your own path. Many do make that move from dream to action, for most this proves to be a life changing event.
Suitability for Self-Employment
- Are you a budding entrepreneur?
- Have you dreamed of having your own business?
- Do you have products or services that you believe others will want?
- Are you enterprising enough to achieve your goals?
So, you may have fantastic ideas and bold determination, but, there's a but . Do you have what it takes to make a success of your enterprise? To clarify, it requires effort and a readiness to embark on new ventures, and to use initiative in business.
The main risks of self-employment
Self employment is a risky business. In other words, as with any change in life there are risks associated with moving into self-employment. Risks are part of your route to self-employment. I am not talking risk to put you off, why would I?
So, be clear of the opportunities self employment offers. Likewise, think about the challenges and actions you can take to reduce risks and maximise your opportunities.
There are several main risks you need to be aware of and consider as you set out on this journey which are summarised here:
Business and financial risks
Make sure you make the right choice for your business situation. For instance, sole trader vs limited company is the normal choice, risk and taxes pay their part. Check our previous blogs to find out more
To clarify, sometimes you will not be clear as to what lies ahead for you. Likewise, many times you may not know if you will have a project after the current one is finished So there may be a period of time between projects, commissions or sales when you are not directly earning any money as you will need to find new work/sales. Certainly, you will need to be able consider the next opportunity and make financial savings for those quiet times when you will need to be marketing or selling to keep the cash flow coming in.
Subsequently, you may have to go a few months without having any earnings as you build up your business. Therefore, make sure you have funds, or access to them cover your living costs as your business build. In addition, you may find you need to take on a part-time job to keep up with your living expenses.
No Employee Benefits
Work for yourself and you don't get the benefit of holiday entitlement, sick pay and company benefits such as a pension scheme. You will not be covered if you take time off work for any reason as you are solely responsible for earning your living. Your You business needs to earn enough money to cover your holiday etc. Consider taking out insurance cover to fill this gap in the event of an extended period off work due to illness. Also, a pension scheme is worth considering; but always take independent financial advice before doing so.
Insufficient working capital or expenses
Working capital is the capital you have available for use in day-to-day business activities. You will underestimate how much money you need to run your business, even if you are simply operating out of your home with a laptop at your kitchen table. Figure out how much money your business will require; not only the costs of starting, but the costs of staying in business (i.e. what will your overheads be?) It is important to take into consideration that many businesses take a year or two to get fully going. This means you will need enough funds to cover all your expenses until you have enough income from your business to cover them.
Failure to price your service correctly
People overestimate the number of clients they will be able to work with at any one time. You may undervalue your skills and the service you provide. To make your business viable you need a manageable and realistic supply of clients at the right fee level. Research your competitors to find out what the market will bear and ensure you do not under-cut them just to get business. Value your business appropriately; customers can often (depending on the sector) equate higher costs with higher value. Under pricing and undervaluing your product/service is not a good strategy.
Over dependence on a single customer
For some who are just starting up on their own, their first client is likely to be the company they used to work for. At first it looks great. You know the organisation; they know you and you have a steady stream of work all from the one organisation. But then you realise you are at their mercy. Whenever you have one customer so big that losing them would make the difference between business success or business failure, watch out. Having a larger number of smaller clients is a much safer option.
Poor financial controls
Yes, you must keep good financial and business records. Review your money coming in and out regularly, Do a cash flow, prepare and use a budget, make a plan. Make sure you file taxes and other business-related documents. If you do not know how to do these, or do not want to, get help from someone competent who does.
Failure to clearly understand your market, your customers, and your customers buying habits
One of the risks of self employment is not answering some fundamental questions. Who are your customers? Are they companies? If so, what industry, what size, what location? Are they individuals? If so, what gender, what age, what type of issues? You should be able to clearly identify them in one or two sentences. Can you do an elevator pitch for your business,
Sadly, setting yourself up in business, getting a website and getting some business cards is not enough to get potential clients beating a path to your door. Learn the basics of sales and marketing and make sure you track the success or otherwise of each technique you use. Then stop those that are not working. Think about your 30 second ‘elevator pitch’ for use in any opportunity.
To sum up, self employment is a risky business. Excitement, nerves, and anxiety. Those were my thoughts as I made that transition over 25 years ago, into the world of self-employment. I'd love to have know more about those risks.
Get in touch with us to find out more about navigating and dealing with your business risks. For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.
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