Are You Ready for the Next Katrina?

"Check out everyone you do business with; employees, vendors, suppliers, customers, advisors and investors," advises Magos. "Dealing with honest and non-litigious folk is a good beginning."

In addition to dealing with the right people, Magos offers the following practical ways to mitigate legal risk:

• Get everything in writing: While most business owners obtain formal agreements such as leases, contracts and employment documents, Magos advises using the same approach for less formal agreements, such as changes in a customer order.

Anything that could come back to bite you needs to be documented," she says.

• Prevent escalation of minor gripes: Many major legal battles start out as a seemingly minor disagreements. Magos says that common sense, good communication and prompt attention should keep most small misunderstandings from being blown out of proportion.
• Don't be a do-it-yourselfer: Just as you would not expect an attorney to be able to successfully produce varietals of wine, you should avoid trying to settle legal matters on your own. Says Magos: "Get a good lawyer and pay her what she's worth."
• Maintain good, solid insurance coverage: Good insurance coverage will protect you against product liability claims, as well as any other claims that you might face. The insurance company will also hire legal representation for you in court in case you ever get sued over a liability issue.
• Insert an arbitration clause into contracts you enter into: Arbitration is far less costly and time consuming than litigation.
• Operate your business in a sensible manner: Magos says this just means doing the obvious things to preserve life and limb and property. For example, shovel snow promptly, remove tripping hazards, have machinery inspected often, insist on safety rules being followed and treat everyone fairly.

Liquidity risk

Simply stated, liquidity risk is the risk that you will run out of the cash necessary to sustain your equipment rental business. And while there are a number of complicated factors that can impact your company's ability to remain solvent, there are three scenarios that typically cause a financial crisis: 1) excessive losses; 2) a mismatch of assets and financing sources; and 3) rapid sales growth.

If you are starting a new business or if your existing business is expanding with new locations or new lines of business, run your projections based on conservative assumptions. You should be able to estimate potential sales with the input of industry consultants and your CPA and banker. And it is critical that you keep operating expenses in check during your start-up or expansion period by watching every dollar that goes out the door.

A mismatch on the balance sheet can be equally devastating to a small equipment rental business. For instance, you should not use operating cash or a short term line of credit to finance fixed assets such as real estate, equipment and vehicles. These assets should be financed by permanent equity or long term debt, or even a lease. Fixed assets will not generate cash flow quickly enough to replenish operating cash or to pay back short term debt when it comes due, and a liquidity crisis will surely follow.

An often overlooked threat to liquidity is rapid sales growth. While sales growth generally is a good thing, in excess it can sink a business. Rapid sales growth leads to rapid increases in inventory. If this is not properly planned for, a business can quickly run out of cash and line of credit availability. And if you are caught off guard by substantial growth, then your banker will be as well, which may well lead to a crisis if the lender is unwilling to increase the line availability. The other risk you run with unchecked sales growth is shortages of inventory, which will certainly hurt your reputation in the market (see above Risk #2).

Planning is key

In summary, risk management is all about putting together a well developed plan and then executing on that plan. If you look at most of the areas of your business as subject to a risk assessment, you will find that your equipment rental business will run far more smoothly on a day-to-day basis. And a smoother running business means fewer crises, more profitability and more sleep at night for you.