Awareness, generosity, emergency fund – unconventional ways for startups to reduce risk
With so many new businesses being launched every day, it’s getting harder and harder to get noticed and stay in business.
What makes the situation even more difficult are many internal and external risks that could potentially put your business out of business before you even had a chance to succeed!
Here are some tips for minimizing business risk to ensure your long-term success:
1. Analyze the risks around you
Categorize your risks according to their impact and likelihood. You need a way to prioritize your risks or you will be overwhelmed.
If you run a service business, reputation loss is probably a bigger risk than financial loss, as it could cripple your ability to carry out day-to-day business.
On the other hand, if you have inventory prone to spoilage or theft, that might be higher on your list.
In general, look for ways to protect yourself from unforeseen costs and avoid situations where a single mistake can cost you thousands (or even millions) of dollars. Investing in technology is a great idea.
For example, many businesses use virtual business phones to easily communicate with their customers. It not only costs less, but allows easy access for all employees, regardless of where they work.
2. Take out insurance
Insurance is a crucial part of any business plan. You can’t predict when accidents will happen, so it’s important to have adequate coverage before your business takes off.
If you’re considering a commercial policy, don’t hesitate: commercial insurance is more affordable for businesses with stable cash flow and consistent year-over-year growth than many realize.
For example, if you plan to purchase $1 million in general liability insurance (which covers bodily injury or property damage), expect to pay between $2,000 and $5,000 per year, depending on your industry. However, if your business has been around for 10 years and has an annual revenue stream of $10 million or more, that same coverage may only cost $1,500 per year.
The problem is that many new businesses avoid buying insurance in order to cut costs. However, it is important to view insurance as an investment that will pay off in the long run.
3. Raise capital
You may need additional financing to expand your business.
Whether you’re looking for an angel investor or a loan from a financial institution, you’ll have a better chance of getting money if you know how much your startup is likely to earn and how much you’re likely to need.
To secure funding, it helps to be able to quantify these things before approaching investors. If you don’t have this information yet, start tracking your spending now so you can provide them with accurate projections when contacting potential investors.
And remember: when raising capital for your business, don’t promise returns that sound too good to be true, because they probably are.
4. Re-examine your business model
Any successful business model will crumble if its creators do not continue to innovate, monitor and respond to their customers and competitors.
As your startup grows, it’s important for you and your team members to constantly assess whether your initial plan is still working as well as it did when it started. If adjustments need to be made, make them to ensure you retain your customer base.
As long as you have a solid understanding of what makes your business work, you should feel confident in making changes that will ultimately help it grow.
5. Keep an emergency fund
When was the last time you lost your job, had unexpected medical bills, or your car broke down? All of these emergencies can add up very quickly and ruin you financially.
It is therefore crucial to maintain an emergency fund that can cover at least three months of expenses. These savings allow you to bridge any financial gaps without having to take on additional debt, which could make it even more difficult for you to get out of your situation.
In business terms, an emergency fund can be a fixed amount of cash to help improve liquidity. This can be used in unforeseen situations such as an increase in product demand or damage to work equipment.
Some companies may also keep buffer stock, which is an extra amount of stock set aside each month to ensure that any unpredictable increases in demand are met quickly. However, this model only works for companies that create goods with a long expiry date.
6. Be generous with employees
Minimizing risk means reducing staff turnover. Your employees are your asset as they play a major role in the growth of your business. It is therefore important to keep them happy.
A great way to do this is to offer them an equity stake in your business. Give them stock options or encourage them to invest in your business with a start-up loan, which gives them loans at below-market interest rates.
When an employee senses that you care about their well-being, they are likely to reciprocate that behavior by investing effort in ensuring the company’s success.
Startups can use these tools not only for motivation, but also to ensure that they don’t lose critical talent in the future.
If an employee leaves your business, they must repay all money received from a start-up loan, which means that if they leave for another job, there will be financial implications.
That being said, provide enough benefits to retain your best employees, but don’t spend more than your budget allows. Here are some effective benefits you can offer:
- Daycare at the workplace
- Free medical insurance
- Leaving for an important cultural holiday
- Parental leave
- A professional therapist to focus on employees’ mental health and personal issues
Most of these options won’t even cost you much; for example, corporate medical insurance policies are very economical because you buy in bulk. Likewise, hiring a therapist can help improve employee morale and productivity, thereby benefiting your business.
7. Have good relations with suppliers
Good supplier relationships are among your most important responsibilities as a small business owner. Vendors are more than just suppliers: they also work hand-in-hand with you to build your brand and reputation, help you with marketing, and increase sales.
They are an integral part of your team. To get good service from vendors, be friendly and courteous when dealing with them, but don’t be afraid to ask for what you need or want; if they can’t deliver something, find someone who can.
8. Manage work/life balance
To succeed in a growing business, your top priority should be managing your work/life balance. You can’t give 110% at work and still expect to have a life outside of it, and you certainly can’t expect your family and friends to agree to be last on your list every day of your life.
When priorities are misaligned, things suffer. Work hard, but be sure to enjoy life. This will ensure that your mental health does not suffer, thus leading to maximum productivity in the workplace.
9. Consider outsourcing
Although most activities can be handled within the company, hiring a professional to perform them will usually result in superior results at lower cost.
However, many entrepreneurs are hesitant to hire experts because they fear spending their limited start-up funds.
The truth is, jobs run by unqualified staff are a huge concern for new businesses because they put critical customers at risk and can lead to poor judgments with long-term ramifications.
To reduce the risk of defective products or costly mistakes, specialized tasks, including law, accounting and technology, should be performed by certified professionals.
We see examples of even the most established companies practicing this practice. Apple Inc. has the resources to do it all in-house, but the trillion-dollar tech giant chooses to outsource the displays to Samsung.
Indeed, Samsung does it better and it costs Apple less to buy screens rather than investing in R&D and resources to offer the same product.
10. Reduce unnecessary overhead
If you’re just starting out or are still in start-up mode, cut back on any additional expenses. Maybe that means working from your garage or renting a cheap coworking office instead of paying for expensive commercial space.
Maybe that means printing flyers and delivering them door-to-door instead of buying expensive marketing software. In all aspects of life, everything costs money – your job is to figure out how much is too much and where you can cut without sacrificing quality.
In addition to cash flow and revenue, there are several other ways to assess the financial health of your business. You should have a good idea of how much money you need to meet your operating expenses and whether you can keep your burn rate under control.
Use these metrics as benchmarks along your path to profitability. If things are starting to look gloomy, don’t panic – just take a step back and think about what adjustments might be needed to keep you on track.