Establishing a new venture is risky in more than one way. Not surprisingly, thousands of startups fail every year, and it often happens because entrepreneurs fail to foresee and manage risks. Financial risks are the biggest of threats that any new business faces during the early phases. When money already runs tight, one wrong move is enough to land your business in a rut and even lead to its failure.
Even as things sound so daunting on this front, it is possible to handle financial risks with the right approach and timely action. But you need to get your strategies right from the start because new entrepreneurs seldom get second chances. Seasoned business owners have some helpful words of advice for newbies to curb these risks strategically. Let us share these with you.
Start with a solid business plan
Developing a business plan before jumping in with both feet is the best piece of advice for new entrepreneurs. It will help you with a lot of things, including handling money troubles. When you have a solid plan, you know how much capital you need to invest in the venture. Also, decide where it will come from, whether from personal savings or external funding. The source of seed capital has a long-term bearing on the startup financial risks, so you must decode wisely. Preparing a business plan also requires market research, which gives a clear idea of the expected cash influx. Additionally, you must have a complete picture of day-to-day day expenses. It will ensure realistic expectations right from the start.
Maintain good records
Maintaining a record-keeping system is not a choice for a business, but new entrepreneurs often miss out on it. Remember that financial accounting is as crucial as any other aspect of setting up a new business. You must have a system in place right from the start because good paperwork keeps you safe and stress-free. It even helps you save money and time when you file your taxes and pay your bills. Moreover, it shows a clear view of where your business is going from the profitability perspective. You can learn about frivolous expenses, which are also cost-cutting opportunities. Not availing of such opportunities is a deadly sin for startups as it can topple budgets and weaken your financial foundation.
Borrowing is imperative at the startup stage, but doing it judiciously can limit your financial risks to a significant extent. Limit loans to the minimum needs so that you can manage interests and repayments comfortably. When you borrow, have your facts clear. Know everything about interest rates, Minimum Payments on a Loan, due dates, and penalties. Borrow from a legitimate lender only and explore the options of quick borrowing so that you are never in trouble when there’s a cash emergency. It is vital to have a repayment plan right from the start because defaults can damage your credit, which is the last thing you will want to happen at this stage.
Keep an eye on accounts receivable
Staying strong requires you to keep track of accounts receivable and ensure they are on the lower side. After all, you need to collect on the sales to keep the cash flow running smoothly. Even though it may take some time and effort, you must know all your customers and their invoice due dates. Ensure that they pay on time and follow up regularly on delayed and missed payments. Steer clear of customers who are bad with payments because they retard the growth and stability of the business in the long run. Low accounts receivable will enable you to limit loans and keep your finances intact as you can build upon a smooth cash flow. Also Read – Things to Know About AI Use in Business
Build a safety net with savings
For any startup to limit its financial risk, saving is the key to building a safety net that can save your business from failure. Look for opportunities to save and have an emergency fund for the rainy day. Create a budget and follow it stringently. Every dollar saved matters, so capture every opportunity you can, from cutting back on expenses to securing discounts, minimizing interests, and more. Focus on personal savings as well, because they may come to the rescue of a faltering business when nothing works.
Insurance is your best defense against unexpected financial risk at all stages, but it becomes even more crucial for new ventures. Though it is easy to cringe at the premium you have to pay, it can be the smartest decision for your startup. Get it even if it pinches your startup budget because it is worth the trouble. Assess your business risks and get coverage from them to save it from disaster. For example, you must cover your assets, plant, employees, and even projects. You will never have to worry about things going off-track because you have coverage to address disasters. Insurance brings peace of mind, which is essential if you want to focus on other aspects of managing your startups.
Build alternative revenue streams
Covering financial risks for startups is also about maximizing your income. Besides working on the core source of earning, you must build alternative revenue streams to cut down risks. Even if the main source suffers from bottlenecks and disruptions at some point, the business will not suffer financially. For example, if your IT business fails to get projects due to a slump in demand, consider outsourcing your employees to keep the revenues flowing. Similarly, a manufacturing startup can diversify the product line to stay operational even during the off-seasons. An alternative revenue stream is like a backup plan to stay afloat even when things aren’t in your favor.
Managing financial risks for your startup sounds like a lot of work, but it is worth the effort. The right approach towards money can save your dream venture from failure and keep you going even in a crisis. Beyond these tips, be smart with every dollar you spend and earn today and even as your business gets established.