We all know that buying a house comes with the risk of depreciating in value. Similarly, starting a business also comes with the risk that it will fail.
But by taking certain precautions you can reduce the risk and start reaping the rewards of a successful business. As a business owner, you need to understand what business risk is in order to mitigate risk.
What is business risk?
Business risk is anything that threatens a company’s ability to meet its targets or achieve its financial goals. Risks can be internal or external, and whilst some risks may be unavoidable like an economic crash, by adopting a risk management strategy, a business can at least shelter itself from other internal risks.
How to reduce business risk?
While business risk cannot be wholly avoided or even anticipated, there are ways a business can reduce their exposure to risk.
#1]. Create a business plan
Creating a simple SWOT analysis for your business will help you identify potential threats to the business. These aren’t just external risks like competitors or suppliers increasing costs, they may also come from within the business itself, like rising staff costs, or over-production.
#2]. Analyse your finances
Most businesses require a cash-injection at some point, whether at the start, at times of expansion and even in times of trouble – this could be from savings, secured business loans, and investors. But ensuring you have a plan in place for the times when the business might not be as profitable, will help reduce the risks.
#3]. Take action
Many businesses fail because they don’t take action when it becomes apparent there’s a problem. If you have created a solid business plan, should a problem present itself, there will be a blueprint for the best ways to respond.
#4]. Use insurance companies
Transfer business risk to insurance companies. By insuring against major risks, should the worst happen either in work, with your product or an external factor, you will be covered. Especially if your personal assets are at risk.
#5]. Keep accurate records
It’s imperative that important records are kept, and activities are logged. Implement a reporting system that allows you to analyse key information about your company’s performance. Records should be kept about cash flow as well as suppliers.
#6]. Implement effective controls
Put in place a system that limits who can authorise specific actions, including spending. This will help you keep an eye on money coming in and out. This should also create a chain of command, so employees are aware of who they should speak with about certain things.
#7]. Continuously assess your business
Despite 660,000 new companies registering in the UK each year, less than 40 percent will survive their first three years. One of the reasons businesses fail is because they remain static and unwilling to change. Businesses need to continuously assess and remodel their business plans and seek feedback in order to survive.
Like life, businesses go through peaks and troughs. In order for a business to thrive, it must learn how to navigate these troughs and capitalise on the peaks. Failure to do so could result in enclosure.