When starting a new business, a certain amount of financial risk is always guaranteed. From a lack of insurance and overly rapid growth to unstable economic environments, there are a number of internal and external factors that could present potential financial risks. And as approximately 90% of all startups fail in their first few years due to unmitigated risk, it’s only natural you might want to avoid becoming just another statistic. To help you out in this endeavor, here are some ways any entrepreneur can efficiently manage financial risks when starting a business:
Develop a good business plan
One of the best ways any entrepreneur can reduce their initial financial risks is by developing a great business plan. Before you fully commit to your new business, you need to consider the amount of capital and time that will be required for starting and growing your company. Efficient market research should also be done, giving you a better idea of the wisest business moves you could take, as well as the realistic chances of success your company has. Although it can be quite easy to get overly enthusiastic and put your all into a new business, lowering your expectations and adjusting your business plan to the current needs of the market is a better way to reduce risk and guarantee success.
Diversify your funding options
When creating the right capital strategy, it pays to consider all available financing options. Even though the initial money might come from your friends, family members, and even yourself, there are a number of alternative ways startups can raise the needed funding. For instance, you can turn to more traditional small business loans and venture capital funds, or even opt for newer solutions such as angel investors, partner financing, and crowdfunding. It’s recommended to take the time to review all available financing options, and then combine different forms of funding into an ideal capital strategy, in an effort to manage your financial risks tax more efficiently.
Limit your debt from the start
While funding is necessary for all startups and diversified financing options are always a smart decision, getting into too much debt from the very beginning can truly be disastrous for most small businesses. If you wish to reduce your financial risks, it’s best to borrow only what you truly need in order to start and grow your business, and keep your debt as low as possible. While the specific amount you need to borrow will likely depend on the needs of your company and your unique financial situation, try to make your loans as low as you can comfortably survive with, while still acquiring enough capital to ensure success.
Reconsider insurance options
From product, personal, and general liability to protection against disaster and physical harm, every business needs several types of insurance policies, and the type of insurance you decide to invest in will entirely depend on the specific requirements of your business. However, junk insurance products are one thing you should never spend your money on. This is a type of add-on insurance sold to consumers along with loans and credit cards, often using unethical sales practices. Not only is junk insurance sold unknowingly, but it also tends to raise premiums and offer entirely worthless coverage, which is why it’s best to avoid it if you can or claim a refund if you’ve already paid for such products.
Create cash flow projections
Cash is incredibly important, and running out of it could be quite detrimental to your business. In fact, it’s often thought that a good cash management strategy is the most crucial risk management tactic. For that reason, it would be wise to make cash flow projections for your business, and even consider planning your personal cash flows as well. These two aspects are often closely associated when it comes to small businesses, and effectively planning both with the help of a financial professional could be key to success.
Don’t under-price your products
During the early stages of their business, many entrepreneurs might decide to price their products and services quite low, with the idea that such low prices could help them stand out in a competitive market. But as your business grows and your operational costs increase, so will your prices, possibly offending the loyal customers you might have acquired. Instead, it’s advised to keep your prices equal to or slightly above the market average from the very beginning, and find more unique ways to set yourself apart from the competition. That way, you will be able to make a healthy profit, and avoid one of the most common financial risks small businesses often face.
Control your business growth
If you set high goals for your employees when selling products and services, they might be forced to take unnecessary risks, which can only cause a bad reputation for your business. Rather than trying to overachieve, it might be better to focus on quality instead of quantity, in order to minimize the risk of lower sales due to high-pressure tactics. And while innovation might be crucial for success, you also don’t want to innovate too quickly. Relying on constant innovation for growth is bound to cause a few hiccups down the road.
Find a good professional mentor
Being surrounded by the right people is truly crucial for business success. This doesn’t only mean working with trusted bankers, lawyers, and accountants, but also finding a mentor who will guide you throughout your entire startup journey. Whether you decide to find a reputable mentor in the industry or even join a local advisory group, consulting experienced professionals can be quite beneficial for your company. As they’ve likely been through the same journey before or even advised similar businesses, such experts will be able to provide you with valuable advice, allowing you to make smarter, more informed decisions, and avoid taking the same unprofitable risks.
Every entrepreneur knows financial risks could truly be detrimental for any small business. And while success can never be fully guaranteed, there are evidently a number of ways business owners can reduce risks in the early stages of development, thus opening the opportunity for growth and increasing their chances of success.