Financial risk is an inherent part of any business venture. Some even compare starting a business to gambling, emphasizing the financial hazard associated with both. Any organization, large or small, can fall prey to financial risk, but startups are more vulnerable to its effects. Regardless of business size, there are steps startups can take to avoid shutting down.
1. Build a robust financial buffer
Emerging businesses are prone to unforeseen expenses, so financial reserves are essential to keep them up and running. The Bureau of Labor Statistics shows that around 20 percent of small businesses fail within their first year of operation, often due to inadequate cash flow. Setting aside money worth three to six months of operational expenses can provide a secure safety net.
2. Leverage technology for financial management
Startups often lack an efficient recordkeeping strategy to help manage bank accounts, monitor cash flow, and send out invoices. Technology helps small businesses gain a competitive edge with automated processes. Incorporating financial management software into recordkeeping can reduce manual errors and streamline operations — one less thing for a business owner to consider.
Some free applications and programs can assist with invoicing, expense tracking, and cash flow forecasting. For emerging businesses, integrating artificial intelligence (AI) tools can provide predictive insights, helping anticipate potential risks before they escalate. Almost one out of four small companies already leverage AI in their operations. Experts predict those that use AI will experience a 12-point profit growth compared to non-AI users.
3. Diversify funding resources
Relying solely on a single funding flow can leave businesses vulnerable to unpredictable market fluctuations. Diversifying fund resources spreads that financial risk so companies won’t struggle if one line of funding experiences rough patches. Consider exploring various funding options, such as venture capital, crowdfunding, business loans, and government grants. Grants specifically designed for small businesses help them get through the startup phase and grow into more stable companies.
4. Conduct regular financial audits
A detailed financial audit ensures that all accounts are accurate, compliant, and transparent. Audits also help detect potential fraud or inefficiencies.
For startups, conducting an internal audit every quarter is advisable. Partnering with third-party auditors annually provides an unbiased perspective and fosters trust with investors. As the business scales, adopting continuous monitoring tools can enhance financial accuracy.
5. Develop a risk management plan
Since risk is unavoidable, businesses must establish a comprehensive risk management plan to mitigate financial uncertainty. A thorough plan involves identifying business-related risks, evaluating their potential impact, and developing strategies to address them.
If the business operates internationally, one example would be to adopt hedging strategies to manage currency exchange in a volatile market. Additionally, securing business insurance can offset unforeseen expenses. Although the government doesn’t require business insurance, startups can benefit from the coverage, which shields them from unexpected circumstances.
6. Monitor market trends and adapt
The market will constantly change. Failing to keep up with trends can lead to missed opportunities or financial missteps for businesses. Monitoring these changes continuously can help companies stay ahead by adjusting their budgets, pricing, and operations.
7. Strengthen customer relationships
Loyal customers cultivate patronage in a business. Studies show that they spend 67 percent more than new clients, which makes deepening customer relationships important. They provide a steady revenue stream as they already know what to expect from a company’s products or services. Emerging businesses can build loyalty by offering personalized experiences, investing in customer support, and implementing feedback loops.
8. Manage debt strategically
Debt isn’t uncommon for businesses. Some consider it necessary for growth, as it can be used to improve amenities, invest in technology, or finance expansion. Taking loans is part of a business growth mindset.
However, high-interest loans or over-leveraging can hamper emerging businesses. Companies must manage debt carefully and prioritize low-interest funding options. Additionally, exploring refinancing options or negotiating terms for existing loans might help free up cash flow.
9. Prioritize team development
Employees are the most significant assets of any business, big or small. An underperforming team can drain financial resources through inefficiency and turnover. Unskilled and unsatisfied employees can affect revenue by as much as 50 percent, highlighting just how critical it is to invest in employee development. Emerging businesses can explore various performance-tracking tools to identify and address employee skill gaps.
10. Prepare for economic downturns
Emerging companies can get crushed by economic downturns, making it critical to prepare for recessions. Consumers will spend less, which means less income for most businesses. If business owners want their businesses to achieve long-term success, they must first survive the short-term challenges. For many, this is where loan applications and grants become most beneficial. These financing sources can cover immediate expenses such as employee payroll, rent, and other costs.
Preparing for a recession also means cutting nonessential expenses, building emergency reserves, and renegotiating supplier contracts.
Future-proofing businesses from financial risks
Strategizing to protect a business from financial risks requires a multifaceted approach. Business owners must tick all the boxes to ensure maximum resiliency and strengthen financial stability. While risks are inevitable, there’s a method as to why other businesses continue to stay afloat despite volatile and uncertain market conditions. However, one thing is for sure — entrepreneurs who prioritize business prudence set their businesses for sustainable growth and success.
Zac Amos is the Features Editor at ReHack, where he covers business tech, HR, and cybersecurity. He is also a regular contributor at AllBusiness, TalentCulture, and VentureBeat. For more of his work, follow him on Twitter or LinkedIn.
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