5 proven strategies for business owners to mitigate financial risks
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Risks come from different places
Both physical and online businesses have various financial vulnerabilities, from payroll to equipment. To handle these risks, there are many methods that are used in risk mitigation, such as risk avoidance, acceptance or digitalization, and there are more complex solutions.
Large corporations can suffer significant losses by poor handling of financial risks, and it’s these we tend to hear about in the news. However, startups and small businesses also need to be careful, as every risk can harm their growth and potential for success.
In a guest post for Transmit Startups, Veljko Petrović explores some of the ways in which startups can mitigate financial risks efficiently.
Financial risks explained
Regardless of the industry of your startup, there are always risks that you’re going to be exposed to.
Startups commonly face problems regarding their funding. They have limited resources and have to make the most out of them through efficient business decisions. Furthermore, the profits that startups make aren’t usually as stable and predictable as profits from established companies.
If your startup is developing new and innovative products, it can be difficult to find the correct pricing model for them. Not understanding how to price products or overestimating them leads to lower sales and unsustainable business.
Sometimes, a good business idea is jeopardised by poor or inexperienced management. First startups have low chances of succeeding, but seeking advice from proficient advisors and managers can make the business much more stable.
Overall financial risks are problems that startups and businesses face throughout their lifetime. They can sometimes be predictable and obvious or they can come totally out of the blue. In both situations, financial risks need to be minimised and handled efficiently.
Businesses constantly increase the amount invested in risk management, which shows that this operational aspect shouldn’t be underestimated. Of course, startups need to handle risks according to their limited resources and budget.
You may have heard the saying; “A ship in the harbour is safe, but that's not what ships are built for”. Everyone can work their 9 to 5, or decide to start a local and traditional business. But it’s startups that brings innovation and excitement to the market and the world needs entrepreneurs like you.
Startups face different risks to established businesses, but once they succeed, they provide immense satisfaction and profit to the entrepreneur and can make a significant contribution to the economy. Minimising the risks as a startup won’t be easy but here are some tried and tested techniques.
Some of the methods can bring benefits in real-time, while others are for damage limitation in times of crisis. Some have been used for decades, while more innovative ones, such as risk management software, have emerged recently.
You can’t decide which methods you’re going to use for risk mitigation if you haven’t identified the risks yet. Every company is usually aware of its risks, and if it seems as if you aren’t threatened by any, you are likely up for an unpleasant surprise.
The first step in mitigating risks is doing a thorough examination of your company, market sentiment, and competition. You need to ensure that you’re aware of the dangers that your startup is exposed to.
Risk audit can be conducted by your in-house staff, or you can hire external advisors or experts that will help you. The end goal should always be to ensure that you can recognise the potential impact of the risks and how likely they are going to occur.
Once you identify the risks, you can then move on to finding the right tools or personnel that will help you erase them, or at least, minimize them. Of course, there are some risks that can’t be predicted, but you should do your best to mitigate all those that are recognised.
One of the modern strategies for risk mitigation is software specialised for managing financial risks. Finding the best financial risk management software isn’t easy, as you need to consider unique aspects of your business, find the weak points, and then choose the right tool.
As mentioned earlier, identifying and scoring risks is an important aspect of risk mitigation. This is made easier with risk management software, as these services usually have tools that will help you detect, analyze and mitigate risks.
The majority of risk management software provides startups with real-time protection for a monthly fee. What’s good about them is that there are various choices that you can make depending on your budget and problems.
For example, if your startup isn’t an online store, then there’s no reason to spend a fortune on software that prevents chargeback fraud. Modern risk management software is further enhanced with the adoption of machine learning and artificial intelligence.
AI is much more efficient and scans vast amounts of data than humans, allowing you to make quicker decisions.
It’s not always easy to understand how insurance policies can help in a specific situation. For example, you can’t exactly predict certain type of damage that insurance policies cover for. However, insurance has been one of the most common methods of risk mitigation for decades.
Basic coverage for startups can be of great help, as it can provide protection from some general problems. As startups aren’t always established, landlords might be extra careful before they rent out the space for them.
In this situation, they usually ask for insurance, so having one is an extra protection in the case of situations like this.
Smarta recommends Superscript - the small business insurance specialists.
Every company should have a piggy bank that’s ready to be broken in the case of an emergency. These funds are usually calculated by identifying the budget required for the company to operate.
An emergency would be something like a natural disaster, losing clients, or various other unpredictable situations. These funds should be used as a bandage for allowing your company to function until it gets back on its feet.
Be cautious with emergency funds, as effectively gathering emergency funds also needs to include calculating expenses. If you have an X amount of money, it might be insufficient no matter how high it might appear at first.
Furthermore, it should be obvious that startups shouldn’t use the funds that are supposed to go to the emergency fund for other problems.
Investing in cybersecurity
While it might sound like unnecessary, cyber threats are common problems that companies face. In terms of cybersecurity, you have access to a plethora of choices, each varying in pricing. For example, you can choose to train each employee on being able to recognize and avoid viruses.
A more advanced option is implementing software and hardware cyber security protocols. Each computer should have some form of anti-virus software installed. Firewalls, encryption and authentication protocols are all methods in which you can increase security.
While corporations have much more valuable user data and resources than startups, they are a much harder target. For example, Google has a much higher budget for cybersecurity than a common startup. This makes startups much more interesting to hackers, as they seem unprotected.
However, with the right combination of security measures, startups can ensure high-levels of protection that can protect them from the majority of cyber attacks.
Modern strategies are crucial for risk mitigation
Nobody can predict the next financial crisis, pandemic or a war, but these situations are unlikely to happen. You should expect a wide range of problems such as lack of cash flow, fraud, too much debt and poor risk management.
Of course, this list is far from encapsulating all the risks that your startup might face. However, the methods from the article will definitely be of use at the start of your entrepreneurial journey, as they will minimize the chances of most common risks occurring.
Keep in mind that no matter how much money you invest in these strategies, your business might fail because of a poor product or a highly competitive marketplace. Consider these strategies just as a prevention for risks, rather than a guarantee of success.