As a small business owner, you’re probably juggling a lot of balls at once, and evaluating your financial risk may not be top of your priority risk.
However, in the absence of a well thought through financial strategy, you may make poor financial decisions. In this article, we’ll take a look at the 10 financial risks that small businesses should be cognizant of and begin preparing for.
Underpricing Business Offerings
During the early stages of a business, many entrepreneurs have a tendency to offer their goods or services at the lowest possible price on the basis that pricing represents one of the quickest methods of distinguishing a business from its competitors in the absence of an established brand. But when running expenses rise, it becomes more necessary to raise pricing. This can, understandably, upset the clients you have already established, and they may perceive the price increase to be unfair. But if you keep your prices low, how will you ever turn a profit?
You can solve this dilemma by conducting an in-depth market analysis of your products. This is useful when you need to explain the price rise to your customers or referrals. Make it quite clear how your products differ from those of your rivals. In the end, it doesn’t matter how much you charge; what matters is that you deliver to your clients.
Taking Your Eye Off Receivables
Do you keep track of the money going in and out of your company? Do you frequently extend the payment deadline for your clients? Are you struggling with cash flow because your invoices remain unpaid? Can you sustain your financial flow over a long-term basis?
To prevent any financial losses and maintain a viable business, you must keep track of your accounts receivable. Your capacity to timely receive the money your clients owe you is essential to the success of your organisation.
Make sure you have the appropriate startup business credit card, regardless of how big or little your company is, so you can keep track of all your costs at every stage of development.
Securing Unnecessary Loans
It can feel like some form of validation to successfully secure a loan for your business. However, just because you are able to obtain a loan doesn’t mean you should!
Banks profit from business loans by charging interest. Therefore, business owners should avoid taking out loans altogether if they wish to reduce the financial risks connected with repaying the fees associated with borrowing money. The same is the case if you are considering securing investment from an angel investor.
There are harsh consequences for breaking the loan’s conditions. If failure to repay debt impacts your credit history, you may never be able to obtain a loan in the future.
Failing to Secure Adequate Insurance
An unforeseen occurrence, such as a robbery, fire, flood, or security crisis, can badly harm or even destroy your company. If something does go wrong, having the appropriate general liability insurance in place can give you financial security and peace of mind.
The first step is to determine the main threats to your company. The next step is to compare insurance policies to locate the ones that provide the coverage you need at the lowest cost.
Reliance on One Funding Source
As an owner of a small business, you must carefully evaluate all your financing options. Of course, you may borrow money from family and friends in the beginning. But there are other financing options available to raise startup finance.
Along with getting assistance from angel investors, you can look into venture capital and pre-seed funding. Additionally, you may be able to take advantage of company assistance programs available from the government.
Employing others without the lack the resources to do so
Employing personnel without having the funds in the business bank account is a frequent issue observed among new business owners.
Regardless of whether you have a remote setup, hold off on hiring individuals until you have sufficient cash to ensure you can pay them.
Reliance on a single source of income
When you first start out, you can expect to have a small customer base with one or two key clients. That’s fine over a short-term basis. But if you want to expand your company without being continually concerned about cash flow, you need to identify a variety of revenue streams.
If you don’t, you run the danger of losing a lot of money if you lose one of your few customers. Consider your company to be a portfolio of stocks. Regardless of the goods or services you offer, it would be beneficial if you held diversified positions.
Ignoring the liquidity risks
Liquidity risk concerns the degree of risk associated with ensuring that your company’s assets are converted into cash that is readily available. For businesses that operate seasonally and see frequent declines in sales during lean times, liquidity risk can be an ongoing financial concern.
Companies that specialise in Thanksgiving merchandise, vacation companies, and Halloween costume makers are all examples of these types of businesses.
You may face serious issues that may compromise the viability of your business if you are unable to pay your employees or procure new products. In the worst-case scenario, your company may go to the wall.
To avoid this from happening, regularly evaluate and manage your liquidity. Also, take into account any banking compliance rules that can restrict your ability to transfer your liquid assets whenever you choose.
Selecting an unsuitable investor
Every investor is unique, and each makes a particular contribution to the firm they invest in. Unfortunately, far too many startups agree to funding without fully evaluating the spread of potential investors.
If your small business decides to secure investment, consider your preferences for an investor and ensure you perform due diligence in terms of compliance and background checks.
The majority of investors will seize the chance to put money into an investment that seems to offer a high rate of return, but you need to take into account what they will contribute as an investor in your business.
Acting outside of a legal framework
Yes, you read that correctly. Failure to comply with regulations could result in monetary consequences for your company. For instance, you might be responsible for paying fines if you interpret a law incorrectly and fail to submit certain documentation to the body in charge of enforcing it.
Alternatively, if you manage an LLC, you can neglect to properly record LLC activity outside of the files containing the Articles of Organization and a number of unsigned template documents. Again, being careless can make your LLC appear unprofessional and unreliable.
Even worse, if you have business partners, they may sue you for breaking the law. On the other hand, if you delay or run out of money and fail to fulfill the conditions of a contract with a vendor, the latter may file a lawsuit against you.
Additionally, if you are working with remote personnel, you need to establish clear guidelines for their employment. When working remotely for your company, it is important to be open and honest about what is morally right and appropriate. For example, it is unethical to work two full-time remote jobs. If a person does not follow the law, you cannot invest in them. Any type of contractual risk might cause your small business to suffer financial damages.