Finance · 6 November 2015

How to brace your business for a black swan event

A black swan event is an unpredictable, unexpected one and can take many forms
A black swan event is an unpredictable, unexpected one and can take many forms

All businesses know things can go awry unexpectedly, but unprecedented, unpredictable events can be particularly hard to swallow – and challenging to prepare for. NatWest explains what you can do as a sole trader to protect your firm as much as possible.

There are three key principles to remember, which we’ll expand on below.

(1) Prioritise financial and creative flexibility

(2) Keep your business (and yourself) fit

(3) Stay savvy and secure online

The term “black swan” became popularised as a result of Nassim Nicholas Taleb’s book “The Black Swan: The Impact of the Highly Improbable”, and it can take many forms – such as a financial crash or political event.

Their consequences can be devastating and unforgiving – the foot and mouth outbreak in 2001, for example, caused a crisis for British agriculture and tourism, as over ten million sheep and cattle were killed, with a cost of around £3bn to the public sector. The private sector picked up an estimated bill of £5bn.

As a sole trader, you may not concern yourself too thoroughly with events such as these, or feel you can’t do much about them as they are by definition hard to plan for. There are ways to mitigate the risk though and you should make sure you’re aware of what can be done.

(1) Prioritise financial and creative flexibility

Sole traders are typically more reliant on external parties than larger companies are, and as a result, are much more vulnerable too. To protect yourself as best you can, a good starting point is keeping enough financial liquidity to recover from anything. Don’t spend time fretting over what might happen, but save where you can to provide a cushion for yourself.

In terms of thinking creatively, networking is a great way to broaden your horizons. By speaking to people outside your immediate sphere, you can hear different approaches and ideas, and flexibility means you can recover more quickly from unexpected events.

Working long hours is part of running your own business, but overdoing it can have a knock-on effect on your firm
Working long hours is part of running your own business, but overdoing it can have a knock-on effect on your firm

(2) Keep your business (and yourself) fit

This one’s easier said than done – the difficulty in juggling all manner of daily tasks is itself a huge challenge for business owners, let alone thinking about looking after yourself properly. Yet, the arduous hours will take their toll and it can have the adverse effect of punishing your business, if you push yourself too hard. A sudden illness could be a real problem for business success.

Another necessity here is getting the right insurance. As well as general insurance, sole traders should consider policies especially designed for small firms or freelancers. Do make sure to stay up to date with changes in health and safety laws for self-employed workers, as these could affect your insurance.

The other way to keep your firm fit is to practice due diligence. Sole traders often rely on one supplier, which obviously decreases flexibility and options available to you if things go pear-shaped. Investigating the financial standing of a company or indeed a person you intend to work with, is a fundamental step to take to protect your business. Don’t just get stuck on a credit score either – be concerned about directors who seem to have several small companies or a string of firms, with similar sounding names.

(3) Stay savvy and secure online

We’ve heard of all manner of cyber security breaches recently – and firms of all sizes have suffered, from TalkTalk to small Scottish business Ellen Colin Hair & Beauty. Cyber risk isn’t unavoidable, but you have a legal responsibility to protect data which is a step in the right direction.

At the very least, a privacy impact assessment needs to be carried out – for further information and suggestions, check out the Information Commissioner’s Office. Many small businesses that do suffer don’t always voice it publicly, as the financial losses aren’t all they’re concerned about. Reputational damage from cyber attacks can be damaging and long-lasting, so doing what you can to make yourself a less easy target is crucial.

You won’t be able to predict every threat, but doing what you can to prepare for “black swan” events will make your business more resilient and likely to withstand unforeseen troubles.

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ABOUT THE EXPERT

Marcelino Castrillo is MD of business banking at RBS in September 2015.   Prior to to that, Castrillo was MD of SME banking at Santander, where he was responsible for leading the challenge of scaling Santander’s business bank and managed the business through a period of significant change.

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