Healthy finances are the key to a business’ success. But challenges arise every day, both expected and unexpected—including impending tax deadlines, overhead costs, remediating damage from a natural disaster, rising interest or inflation rates and, unfortunately, many more.
Operating with fewer resources and, often, razor-thin margins, small-business owners in particular need to get a firm grasp on financial risk management so they’re prepared to meet recurring and singular cost-incurring events. Below, 15 Forbes Finance Council members share their tips to help small-business owners better manage their financial risk.
1. Speak With Other Small-Business Owners
Running a small business is risky. Bureau of Labor Statistics data shows that only about 50% of businesses make it to five years. I believe the best source for learning about risk factors is via discussions with real small-business owners whom you trust. Seek them out and ask for some time to ask specific questions directly related to their experience and your challenges. It will be time well spent. – Khalid Parekh, FAIR Bank
2. Get The Right Paperwork In Order
Invest early in getting your corporate structure, ownership structure and shareholders agreements in place. For small businesses, these items often get pushed off. They are the foundational pieces to risk management within a business. With the right documentation and work, they will protect businesses both financially and legally. Without them, the exposures can be catastrophic. – Daniel Kachani, Aria Wealth Solutions
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3. Do A Proactive Review Of Risks
Identify any potential risks and take the needed steps to reduce them. Risk management should be treated like preventative health care. If you can take care of it before it becomes a problem, your business will be in much better shape. – Antoine Sallis, Rapid Credit Boosters
4. Create A Cash Reserve
Setting up a cash reserve is critical for small businesses, particularly ones with thin margins. You don’t want to be stuck in a position where you need to make business decisions based on the available cash balance. Having a reserve that allows you to continue managing the business properly in times where inflows and outflows may not be perfectly matched is key. – Sean Frank, Cloud Equity Group
5. Create An Emergency Fund, And Diversify
When a small business is losing ground, leaders tend to give up easily, thinking that the loss is not too costly if it means avoiding risk. How can you expect your company to grow if you keep this mindset? An emergency fund should be the immediate resource; it will boost your confidence in growing the business. The next step is to diversify. Combined, these two will ensure the success of the business. – Neil Anders, Trusted Rate, Inc.
6. Reevaluate Your Vendors For Cost
Control costs at all times! Reevaluate your current vendors to determine if they are the most cost-effective options currently available for your business. Doing so will allow you to identify other third-party vendors that offer the same services at considerably lower rates. If your current vendors are cost-effective, look for other ways to shave costs and increase your bottom line. – Mara Garcia, Phonexa Holdings, LLC
7. Be Wary Of Vendor Projections
Many business owners develop strong relationships with the vendors they buy products from. I’m not against vendor relationships, but it’s important to understand that their inherent bias toward the product they’re selling can, and often does, lead to overly optimistic projections. Many times, this isn’t discovered until market conditions go from good to poor. – Michael Jay Markey, Legacy Financial Network
8. Evaluate Your Cash Position
The greatest risk to any business (but especially small ones) is solvency. This is especially true in turbulent economic times. As businesses are being squeezed by rising costs, continued supply chain pressure and higher interest rates in a tightening debt market, businesses should evaluate their cash position to ensure they can survive in the event of protracted financial pressures. – Glenn Hopper, Sandline Global
9. Understand The Five Basic Risks
Financial risk management is about identifying risks and making decisions based on them. There are five basic financial risks: market risk, credit risk, liquidity risk, operational risk and legal risk. It’s important to understand financial risk management and hire the right professionals. Even on a razor-thin budget, protecting your company against financial risks is the only way to grow. – Jared Weitz, United Capital Source Inc.
10. Invest In Qualified Professionals
While small businesses often focus on keeping costs as low as possible, it’s important to employ experts and spend on services to mitigate financial risk. For example, maintaining proper insurance coverage, outsourcing IT security and hiring qualified tax and compliance consultants will protect a small-business owner from the financial impacts of unforeseen events. – Jennifer Eubanks, CPA Department
11. Understand The ‘Ins And Outs’ Of Cash Flow
For small businesses, the backbone of financial risk management should revolve around cash flow. Business leaders need to understand when cash is expected to come in, what expenses are required and how much money is available at any given time. Leveraging cash flow management tools to plan for the future will ensure a business has enough cash to sustain operations through any storm. – Nick Chandi, ForwardAI
12. Plan For Cash Flow Variation
The key here is “management.” For a small business, that is often a matter of ensuring an adequate level of liquidity to allow for short-term cash needs. This can mean visiting the bank before there are problems to ascertain what lenders are thinking. In a sense, learning about financial risk is a matter of planning for cash flow variation. – Dr. Philip Fischer, Micro Macro Infinity
13. Review Cash Flow Each Month With Your Financial Advisors
Cash flow management must be a high priority for a small business. According to a U.S. Bank study, 82% of business failures are due to poor cash management. Early on, a small-business owner should look to a dependable accountant and bookkeeper to keep tabs on the finances of the business. And the business owner should set aside time each month to review cash flow with their professionals. – Robin Vernon, Proper Wealth
14. Keep Business And Personal Accounts Separate
It is important to know everything about your company’s finances, stay on top of your accounting and maintain accurate financial records. Keeping your personal accounts and business accounts separate will ensure your business is financially secure before investing. When planning for internal risks, think about the foreseeable market factors and external factors that could jeopardize your company. – Crystal McCullough, The Spearhead Group Inc.
15. Tap Into Local Business Resources
Many small businesses can’t afford their own accountants. The good news is there is abundant free and low-cost financial advice out there. Leveraging local nonprofit business assistance providers such as women’s business centers or small business development centers is an affordable way to connect with trusted experts who can provide one-on-one financial coaching, help you tackle financial risk and more. – Carolina Martinez, CAMEO