Owning and being in business for yourself can be challenging at times, so knowing how to identify and manage risk is an important part of running a thriving business.
Risks are anything that can impede a company’s progress towards its financial objectives. Several factors can hinder their success, and some may even lead to the ultimate downfall of the business. Other risks may cause damage that can be challenging to recover from.
However, taking risks is an essential part of growing a business – it’s how you thrive and expand. The key to achieving the rewards that come with risk and avoiding the devastation that can occur is identifying and actively managing your business risk.
Assessing your tolerance for risk
The first step is to consider what level of risk you are comfortable with. A range of factors influence your appetite for risk, including your individual circumstances, financial resources, specific industry dynamics, economic conditions, and business goals.
It’s important to understand that high-risk activities come with the potential for significant returns but also greater uncertainty and potential losses when aiming for growth.
Not all risk is equal
Some types of risk are best managed through insurance, while others can be managed through thoughtful decision-making and risk mitigation.
Risk-taking is often associated with innovation and entrepreneurship, and there are countless examples of rash business behaviour that paid off – but there are also examples of when it did not pay off.
Businesses may need to take calculated risks to expand, evolve, and stay relevant in a changing marketplace. This can encompass the development of new services or, targeting a different client base, employing staff, developing new products, adopting emerging technologies, or exploring new markets.
Taking calculated risks involves some planning – conducting research, gathering supporting data and considering possible outcomes before making a decision. Informed, calculated decisions have a greater chance of success and doing your homework is a great way to mitigate risk in business.
Managing business risk
Depending on the type of risk, there are many ways to manage business risk. Threats come in many shapes and forms and can include strategic, compliance, operational, environmental, and reputational, but one of the most fundamental risks is that the business will no longer be financially viable. All the above can impact a business’s bottom line, so when considering your strategies, it’s important to identify the risks that could affect your business’s ability to meet its financial obligations.
Setting up and maintaining a cash reserve is critical for small businesses, particularly ones with narrow margins. Half of all small businesses hold a cash buffer of less than one month, which may need to be revised. A cash reserve is a great risk mitigation strategy as it can help you get back on your feet when faced with an adverse event.
Keep an eye on your cash flow
Sometimes, growing a business can put pressure on your cash flow, and managing your cash flow is a powerful way of managing your business’s risk.
If you have not already done so, creating and maintaining a cash flow forecast helps you anticipate cash shortages. Monitoring your cash flow over time gives you visibility of your financial situation and an understanding of any seasonal market changes.
To manage your cash flow, you can be responsive with invoicing and chase overdue payments. Negotiate payment terms that support your cash flow requirements and consider offering incentives for early payments or penalties for overdue invoices.
For many businesses, one of the leading causes of cash flow shortfalls is overstocking, which increases the amount of cash locked up in stock. Effective inventory management and working with suppliers to reduce lead times can assist with cash flow.
Next steps
We can help you develop solid cash flow management and provide expert advice to make growing your business less of a risky proposition.
Speak with your local Nexia Adviser today to connect your business with its true potential.
