The Secrets To Effective Risk Management
Entrepreneurs are often considered risk-takers and sometimes even gamblers. This is true and indeed it oftentimes characterises such individuals. However whilst risk-taking is often glorified by successful entrepreneurs, risk management put in place to achieve success is often kept secret. A new entrepreneur might be forgiven to think that he or she must risk it all at the beginning to launch a business. Rest assured that this is not the case.
Only risk what you can afford
If you are just starting out, chances are that you are going to need funding. Traditionally, the main option would have been to borrow from a bank. Whilst this is still a good idea, many people fail in risk management immediately by borrowing more than they can afford. As an entrepreneur, you need to have a strong conviction that you will be successful. On the other hand, you also need to have the wisdom to understand that sometimes things can go very wrong.
If you borrow more than you can afford or more than you can earn and repay within a couple of years as an employee, then you will also have the fear of bankruptcy at the back of your head. The first step of risk management is to always have an out. If you need more money than you can afford look at modern alternatives, such as crowdfunding, equity or angel investors, or finding a partner.
Stop treating insurance as an enemy
Risk management is only effective as long as you have a way to recover from a disaster within an acceptable timeframe. Insurance is an important tool and although it is considered by many to be an expense, it should be viewed as a non-tangible investment. After all, who isn’t glad of having insurance in a car crash or home insurance when a house is robbed or damaged?
Today you can find specific insurance to cover a wide range of disasters, small and large. It would be too expensive to insure your business against everything, but you can prioritise. Start by insuring the key person(s) whom your business depends on and have the basic property theft and damage cover too. As you grow you might want to consider employer liability and equipment protection insurances too. You will find that insurance is a lot cheaper when you buy a tailor-made business packet. Make sure to read the fine print and seek legal advice if necessary.
Control your cash flow
Like with most things in business, the goal of risk management is all to do with money. If you successfully manage risk you will be able to grow and profit from your business. In order to do that, you need to give your primary focus to cash flow management. The term cash flow is sometimes misunderstood, but it is simply the physical currency entering and leaving your bank account. I mention physical currency because many times people consider invoices as representing money, but they are wrong. Invoices represent a promise to pay, but sometimes it is hard to get paid.
Monitor your expenses and your income constantly and be wary of any considerable spending before getting paid by the customer. I strongly recommend you always seek a minimum deposit of 35% for any project. Doing this will help ensure that your cash flow stays healthy. Remember that the time between the fulfillment of a purchase order and the moment you get paid could be as long as six months. You can proactively plan for a healthy cash flow in your business plan. This plan is not a boring document you write at the start of your business. It is a guide which you could refer back to when you need it.
Set up multiple companies
This process is sometimes associated with criminals and tax evaders. However, in reality, it is a legal and effective way to risk management. In many countries nowadays it is very easy and cheap to start a new limited liability company. In the UK it costs as little as £15. The main advantage of setting up multiple companies is to limit the risk a disaster in one company will have on the rest.
Imagine that you have a PR disaster in one company. Whilst you are defusing the situation your other companies are not affected. If you only had one company then everything would grind to a halt until the situation is resolved. Think carefully about which part or parts of your business you can separate. For example, you could set up one business to offer a higher-end product to wealthy customers and a similar, lower-end product to the masses. Of course, each business would need to follow local legislation and tax rules. However, the extra cost of this could be negligible to your entire business being put on pause.
12 thoughts on “The Secrets To Effective Risk Management”
An often overlooked aspect of business, thanks for writing this.
Thanks Terry for your comment.
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Thanks Sherri for sharing our blog with your friends and for your wonderful comments. We love getting feedback on our articles and would like to take this opportunity to thank all our readers and commentators for their support.
In my first business, I risked more than I should have and lost my life savings. Luckily I was 20 then so it wasn’t the end of the world. I hear stories of people risking their home or their family’s savings and I am flabberghasted! I hope that this article helps many new entrepreneurs not make the same mistake I did, thanks for writing it.
I’m sorry to hear of your problems, Dawna, but I am glad that you’ve learnt from your mistakes. Feel free to share this article on your social media pages to help your friends who might be new entrepreneurs. Thanks.
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