Part of entrepreneurship is knowing your business’s financial risks and understanding how to manage those risks as they come. This is especially important for small business owners. While each entrepreneur has their own situation, business model, and financial risks associated with their industry, small business owners commonly run their business with smaller margins and fewer cash reserves than large companies.  

Risk management is a somewhat complex subject area, but many straightforward strategies can mitigate known risks. Here are our top 5 tips for small business owners:

Organize and Maintain Financial Records

One of the most important things a business owner can do is keep accurate, up-to-date business records as soon as you start your business. This ensures your finances will be accurate from the very beginning, and you’ll be able to make more accurate projections and analyses. It is also beneficial to hire an experienced Certified Public Accountant (CPA) or another tax professional, even if you know how to handle basic accounting tasks. By doing so, you will save time, stress, and potentially save you money by having a more experienced eye looking over your financial documents and taxes before filing. 

Being meticulous and keeping organized financial records will reduce the likelihood of running into bookkeeping errors and help you confidently make decisions regarding financial risk.

Know Your Weak Points

All business frameworks should include a list of strengths and weaknesses, and every type of business has its own set of unique challenges. Are you selling products that are “wants” or “needs” for consumers? What are your expenses and total monthly fixed costs? Do you lack a marketing plan to grow your business? Once you know your weak points, you can create a plan of action to address them.

This could mean doing things such as making sure you have a variety of inventory or change your inventory mix, building a cash reserve, or consulting a marketing specialist to ensure you have a strategy to build brand awareness and attract customers to increase your revenue.

Measure Risk Methodically

When it comes to making decisions about financial risk, you should base your decisions on the three pillars of time, money, and quality. Does the risk you are considering fall within your project’s current timeline? Does it fit within your budget? Do you risk the quality of your brand by taking the risk?

By taking a procedural approach to financial risk decisions, you’ll be able to see how the risk could potentially affect things from different angles, helping you to make a better decision.

Keep Personal and Business Funds Separate

While this may seem like common sense, it’s vital to keep your personal funds and business funds separate from one another. This not only keeps you from having to sift through disorganized bank statements, receipts, bills, and other financial documents, it also helps protect your personal assets.

Owning a business is a risk in itself, and you don’t want to have to worry about your cash, bank accounts, or real estate from getting tangled up in any financial problems your business may encounter. It also makes things like filing taxes or applying for loans simpler because the business’s financial position is transparent.

Always Consider the What-Ifs

Reviewing the facts and weighing the pros and cons are reasonable first steps in the decision-making process. You’ll also need to consider outside factors, worst-case scenarios, and what-ifs.

If you’re considering a financial risk, you need to ask yourself questions such as: What if this turns out to be a total loss? Will my business survive if I take this risk? Am I willing to live with my decision to take the risk if it fails?  If the answer is no, you’re better off moving on.

Many times, risks come from a lack of knowledge. Any area that seems “risky” should be researched accordingly. Use credible sources and seek out advice from trusted financial advisors. To properly compare risk versus reward, be sure that you fully understand what areas of your business contain risk and how taking risks could potentially impact your business goals.

This content is developed from sources believed to be providing accurate information, and provided by Spectrum Management Group. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.