Mitigating Financial Risk Starts with a Solid Plan
Entrepreneurship and starting a business inherently come with risks and uncertainties. Some are exciting, such as “Will my product or service solve an everyday problem” or “Will I make an impact?” Others aren’t so exciting. Entrepreneurs face various kinds of risks, including financial, market, competitive, operational, legal, and reputational. In some cases, entrepreneurs may run into financial risks, which could lead to a business’s downfall.
So, what is one way for an entrepreneur to decrease risk? Well, one of the major ways business owners can mitigate risk is to start the project with a solid business strategy and a strong financial plan.
Let’s focus on the business plan first. To secure sufficient funding from investors and qualify for business loans, it’s important the business plan is robust, covering all necessary components: market research, funding requests, marketing and sales plans, financial projections, and more. It should be based on current data, sales, market interest, and feedback from customers. When all of this information is compiled, determine if your plan is financially viable and has the potential to be a success.
Now, let’s cover the financial plan and how to secure proper funding. Ensure you have the funds to weather any storm, whether it be a small social media faux pas impacting the brand or a nationwide economic crisis impacting sales. Your blooming small business needs to be prepared.
How Can Entrepreneurs Mitigate Financial Risk
Maintain Strong Cash Flow Management
Managing cash flow effectively is crucial for any business. Entrepreneurs can reduce financial risk by regularly tracking expenses, setting payment terms that align with cash flow needs, and negotiating favorable terms with suppliers. This ensures the business stays liquid and can meet its obligations.
Diversify Income
When first starting a business, you may want to have more than one source of income to support saving goals and act as a backup plan. Relying on a single source of income is risky. By diversifying revenue streams, entrepreneurs can cushion their businesses against downturns in specific sectors or customer bases. This can include exploring different markets, product lines, or services to reduce reliance on one area.
Keep Accounts Receivable Low
Ensure you are collecting from customers. Keep records and follow up with clients who have outstanding invoices. Add timeline clauses to your contracts to hold customers accountable for payments.
Save, Save, Save
Build up extra personal and business funds in case of emergency. With that, it’s important to be mindful of spending habits. Keep records of all business and personal purchases. Review those documents every month or quarter to determine where you can cut back and save money.
All those savings bring us to another essential component of mitigating business risk: liquidity. Don’t put all your funds into real estate, physical assets, or long-term investment accounts. Liquid assets are key to securing loans and overcoming financial challenges.
Buy Insurance
Purchasing insurance for your business can bring you peace of mind. Business insurance is essential to protect against unforeseen events. Entrepreneurs should consider options like general liability insurance, property insurance, and key person insurance to safeguard their assets and reduce financial exposure.
Leverage Financial Forecasting Tools
Utilizing financial forecasting tools aids in predicting future financial conditions. This allows entrepreneurs to plan for potential shortfalls or opportunities, enhancing strategic decision-making.
Understand Loans & Enlist the Right Lenders
Most small businesses need loans to fully fund the project. Entrepreneurs can reduce financial risk by being mindful of the various types of loans, terms, sizes, amortizations, loan-to-value ratios, and debt-service coverage ratios. Not only is choosing the right loan integral to reducing risk but also enlisting the right lender plays a critical role in the matter. Choosing the best lender for your needs can provide support and assistance throughout the growth of your business.
About AVANA CUSO
Established in 1998 and headquartered in Simi Valley, CA, AVANA CUSO and our sister entity AVANA Capital offers a comprehensive range of commercial loan products, including SBA 504 loans, real estate, hotel construction financing, conventional construction, and renewable energy loans, tailored to help entrepreneurs grow their businesses. We partner with credit unions and connect them to investors across the United States. Additionally, we uniquely support and guide our partners through the entire loan process. AVANA CUSO is a proud member of the AVANA Family of Companies.
We refreshed the content of the blog in November 2024 to make it more suitable for the audience.