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  • Writer's pictureRalph Achille

5 Tips on How to Manage Financial Risk as a Business Owner

It is critically important to manage financial risk as a business owner intentionally.

While many different types of risks are involved with having your own business, it is in your best interest to do all of the things in your control to help mitigate these risks.

In this article, we outline 5 tips on how to manage your financial risk as a business



Key Takeaways:

  • Truly understanding every aspect of your business allows you to manage financial risk as a business owner most effectively.

  • When starting your business, keeping your expenses (personal & business) lean in the early years pays off.

  • The earlier you start and the more consistent you can be when it comes to maintaining accurate financial records, the better off you will be.

  • Understanding your cash flow and minimizing debt is critical to your long-term success.

Know Your Strengths, Weaknesses, Opportunities, & Threats (SWOT)

If you've ever taken a business or marketing class, you may have heard of the term SWOT. This framework is very effective for any business owner to think through to manage the financial risk inherent in their business.

SWOT analysis is a strategic planning technique used to help a person or organization identify (1) strengths, (2) weaknesses, (3) opportunities, and (4) threats related to business planning, competition, and growth.

By using this framework, a business owner can have a strong guide in helping identify where potential financial risks may come up.

  • Strengths: What does the business excel at, and where does it differentiate itself from its competition?

  • Weaknesses: Where does the business fall short, and what could it improve upon to succeed?

  • Opportunities: What external events or potential impacts outside of the business could be favorable?

  • Threats: What factors could lead to potential harm or negative impact on the business?

Improve Weaknesses & Threats Without Hampering Your Strengths & Opportunities

Every business is going to have different answers or responses to each of these four important categories.

The key to managing financial risk is to address your weaknesses and threats in a way that does not undo your strengths and opportunities. The goal is to optimize your strengths and opportunities while getting ahead of your weaknesses and threats.

This task is not easy, but the most successful and resilient businesses do this well.

As a business owner, you have to make important and impactful decisions daily. When it comes to understanding your business's SWOT analysis, you have to prioritize (and lean into) your strengths and opportunities. This will ensure that you are doing what you need to do to propel your business into positive profit and success.

Secondly, you need to identify the weaknesses and threats that pose the most impactful harm to your business — after that, making a plan that improves your weaknesses and removes the threat is critical.

Keep Personal & Business Operations Lean In The Early Years

According to the U.S. Bureau of Labor Statistics (BLS), approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years.

We are very supportive of helping business owners defy these odds, so we are writing this article.

However, there are many common reasons why most businesses do not exceed. Among them include not having a strong business plan, lack of understanding of their market, too little in financing or a savings cushion, and not being agile enough as the business landscape changes.

For these reasons and many others, we believe it is critical that business owners keep their personal & business operations as lean as possible in the early years.

Sometimes this may be hard to do, depending on the type of business that you own. However, if you can cut expenses and stay lean during the beginning, you will allow yourself a much longer runway to succeed.

This is true for your business expenses but is also even more true as it relates to your personal expenses. Most business owners do not think of this aspect, but it can get into a tough situation if your personal expenses stay the same or increase when you try to start your business.

In short, staying lean can improve your odds of success.

Maintain Accurate Financial Records to Manage Financial Risk as a Business Owner

Maintaining accurate financial records is a complete game-changer for any business. Hopefully, this is something you started off doing from Day 1. However, it is never too late to get this one right.

Whether you use a bookkeeper, CPA, or manage it yourself using accounting software, this one has many benefits.

First, by keeping accurate financial records, you will be able to understand how the business is doing. This will more effectively help you make important business decisions.

Second, when you keep accurate records, you are setting yourself up for less stress come tax season. It may sound like a lot of work for most business owners throughout the year. However, if you do a little work during the month or in each quarter, you can avoid the last-minute scramble before your filing deadline. This will make your life much easier and minimize potential financial risk.

Lastly, it is important to note that keeping your personal and business funds separate is critical. Whether you are concerned about deducting expenses (tax planning) or protecting your liabilities (risk management), you maintain a lot more control when you keep things separate.

Create Both Business & Personal Cash Flow Projections

Cash flow management is the most important aspect of personal and business finances.

As noted above, staying lean in the early years is critical to your business's success. The same is true for understanding your cash flow projections. However, this applies to the early years, even if you've been in business for 30 years.

You can plan accordingly when you have a forward-looking view of what to expect for money in and out. This allows you to be nimble and make changes when needed (whether it be on the personal or business side).

For example, if you expect an increase in costs because a key supplier closed their business, you can project that out and find the most efficient way to change things up on your end.

Manage Financial Risk as a Business Owner by Minimizing the Use of Debt

As with every tip already noted, the theme associated with managing financial risk as a business owner is centered around putting yourself (as the business owner) in the best possible position to have long-term success.

When it comes to debt, you want to make smart decisions on utilizing debt because maintaining liabilities on your balance sheet can be a huge burden.

By minimizing the use of debt, you are giving yourself and your business a lot more flexibility regarding cash flow management. This is critical!

Debt can be a burden on startups or any business because it is always there. Even if you get ahead and make some headway with increased revenues, you will have to pay off the debt in order to reach profitability. This can be a big drain on the business's morale and the balance sheet.

We Can Help!

Being a business owner is complicated. In addition, many different types of risks make it hard to succeed in the long run. We value small businesses and want to help you manage financial risk as a business owner.

Our firm is here to help and guide you in making that decision. We specialize in working with minority business owners. Please Click Here to schedule a 15-minute introductory call.

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