Did you exceed your budget on your business expansion costs? Or maybe you miscalculated your expected ROI? As an entrepreneur, you should have an excellent grip on financial management; otherwise, you’ll end up hurting your business financially by exposing it to risk.
Financial risk is an obstacle that can distance your company from meeting its long-term goals. Today, every business is exposed to at least some financial risk, and that’s why many startups fail. Therefore, you should do your best to keep these risks to a minimum to maintain a decent cash flow. Here are some tips on how you can do that:
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Design a capital strategy
The most significant financial risk for any business is a used-up operational cash flow. Cash flow is essential to acquire new financing, stay afloat, and avoid bankruptcy. If you don’t have a good capital strategy in place, you won’t have enough cash to the milestones required to bring in new investors.
This is what you should spend a good portion of your time on – structure your capital strategy to make sure your company is attractive to investors. Enrolling in an online masters in accounting degree will equip you with the proper knowledge to assess your business’s financial situation. It will also help you develop an approach that aligns well with business objectives enabling you to mitigate financial risk.
It would be best to have a capital runway of 18-24 months. During the ongoing pandemic, companies with good investors had sufficient cash to run for 18-24 months and live through. In contrast, companies that didn’t have a capital runway of more than 3-6 months failed to survive.
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Carry the right amount of insurance
The right business insurance plan is a sure shot way to limit the amount of risk your business is at in the case of bankruptcy. You’ll be able to protect the company from losses, especially those that you can’t afford to replace. Of course, it doesn’t cover smaller expenses like a minor roof repair or a fender bender. Make a note of this before paying bigger premiums in return for lower deductibles.
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Diversify
Diversification is a standard investing guideline for managing financial risk, requiring individuals and businesses to invest in various investments instead of throwing all their eggs in one basket. One common method of diversifying is to split the money in a particular manner, for example, 20% in international investment instruments, 30% in derivatives or domestic stocks, 25% in government bonds, and 25% in low-risk money markets. By doing this, you’ll spread the risk your business is at among a variety of risky and safe investments in various economic markets, and if one of those instruments sinks, you’ll still have a chunk of your assets secure.
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Make wise investments
Investment-related risk is one of the most palpable and most potent financial risks that a business can encounter. Fortunately, there are a ton of ways to avoid this.
Before investing in anything, make sure you’re equipped with sufficient information. Speak to your accountant – this will help you immensely. They’ll be able to offer you sound advice on how you can amplify your returns.
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Do background checks
Besides taking into consideration all your financial operations, you should learn about new team members and investors. Bad credit history can hurt your company’s financials and won’t help you get a bank loan when you need to decrease risk either.
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Enter a shareholder agreement
Let lawyers help you enter an appropriate shareholder agreement. The shareholder agreement highlights the obligations and rights of various shareholders, for example, veto rights, ownership, and when any capital must be repaid. It can help prevent disputes over the amount one receives if the company is sold, help prepare for issues as they emerge, and set the right expectations.
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Maintain sufficient emergency funds
If you want to avoid jeopardizing your business due to unforeseen consequences properly, keep dual emergency funds. Try keeping a small fund to help deal with low-impact, short-term financial setbacks of roughly $2,000 or less. You should also maintain a separate emergency savings account with at least 3-6 months of operating expenses for a longer-term crisis. This also brings us to the next tip.
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Use a savings account
When making investments, you should hold some part of your capital back. By using a savings account, you’ll always have some cash for emergencies. Plus, if the bank/credit union provides interest on the savings account balance, the initial amount will increase over time. Also, you can create quicker transaction times by electronically transferring funds when purchasing or selling investments.
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Develop a solid business plan
If you don’t know your business’s nitty-gritty when launching a new product/service, you’re not playing safe. You’ll also need a thorough knowledge of the competitor landscape and industry. Are you planning to sell something that doesn’t have a good demand? On paper, this question looks very obvious. However, 42% of businesses fail because their product/service isn’t what the people need. That’s precisely why you should read up on the concept of product-market fit, especially if your business is in its preliminary stages.
Launch an MVP (or minimum viable product), test it on your potential customers, and get thorough feedback to determine if people really want it.
Don’t forget to perform a scenario analysis when coming up with a business plan. Your cash flow can be affected by mapping out every potential positive/negative scenario.
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Design an exit strategy for every investment
While you can never guarantee if you’ve paid an optimal price for an investment, you can always control how much you can lose. But how? By not being emotional. So, whenever you take a position on bond, stock, or any other investment for that matter, always create an exit strategy. You can do it by building predefined selling points for a loss and a profit.
Conclusion
Every investment involves at least some amount of risk. However, certain investments are considerably less risky than others. By managing risk properly, you can generate income while ensuring you don’t lose your capital on bad decisions.
While you can’t eliminate financial risks, you can work around them through the tips mentioned above. This way, you’ll ensure that your business never loses too much in one go!
