Managing financial risk is of course essential for every organization. But financial risk management for small businesses is even more pressing. That’s because small businesses tend to operate with fewer resources, smaller profits, and lower cash reserves. This leaves them more vulnerable to any of the many difficult situations that can challenge a company’s profitability and survival.
Here are some of the top precautions for financial risk management for small businesses.
How Small Businesses can Manage Financial Risk
- Identify your greatest weaknesses. You can only prepare for risks you’re aware of. Does your revenue drop during certain times of year? Are you overly dependent on a particular vendor? Know where you’re vulnerable and focus on strategies to address these areas.
- Keep your operations lean. Control your costs. Shop around to find the best vendors at the best prices. Be proactive about preventing and eliminating waste. Be on the lookout for ways to save your small business money. This not only increases profitability, but also better positions you to weather downturns.
- Create business and personal cash flow projections regularly. Understanding and managing your cash flow is one of the most crucial parts of financial risk management for small businesses and their owners. Because the last thing you want is to run out of cash.
- Keep your personal and professional finances separate. You’ve undoubtedly heard this advice, and it’s good advice. It makes life so much easier, especially at tax time, but it’s also to protect your personal assets against risks faced by your business. Here are the critical ways to keep your personal and business finances separate.
- Remember to consider market and other external risks. Planning for internal risks is only part of the picture when it comes to financial risk management for small businesses. What are the foreseeable market factors and other external factors that could jeopardize your company?
- Deliberate thoroughly about financial risks. Always weigh them against the potential rewards. Measure them against your time, money, and quality. That is, does the risk fit within your timeline and budget, and can you maintain your brand’s quality (of service, goods, etc.)? Consider the worst-case scenario; are you willing and able to live with it, should it come to pass? If not, it’s probably not a risk worth taking.
- Know everything about your money in and money out. It’s so important to stay on top of your accounting and maintain accurate financial records. If you don’t hire someone to do this, make sure you’re doing it.
- Have cash reserves. Count on drops in revenue. Count on unforeseen expenses. Count on the need to have extra money on hand. Common advice says to have, at the very least, three to six months of operating expenses available.
- Educate yourself about debt. While being debt free is always nice, sometimes taking on strategic debt is key to succeeding in a small business. At the same time, too much debt can drag a business down. Learn about different types of debt and using it smartly.
- Generate multiple streams of revenue. Some of the worst risk a small business can face is when too much of its money is dependent on a single source, service or product, etc. Look for opportunities to generate new revenue streams that will help you build cash reserves and create greater financial stability.
- Be smart about growth. Growth is great, but only when it’s right. Otherwise, small businesses easily stretch themselves too thin, and often end up siphoning money from a more successful area or location to cover losses in another. Here are some questions to help you decide if the time is right to expand.