From large corporations to small sole-proprietorship businesses, every single one of them carries with it many kinds of risks. Risks such as consumer market transitions, legal issues and personnel safety — and most importantly, financial risk. All businesses need to assess the risks within their firms and in their industries to come up with the best ways to reduce the chances of risk. Small businesses face a large number of risks which are indeed preventable. In this guide, we’ll outline financial risk management and ways in which business owners can minimise their risks.
Financial risk management in your business
Finance is at the heart of every business – from investments to profit margins. As a business owner, you must manage your finances and log everything properly. Of course, as an owner, you also have many other responsibilities, such as employee training, business development and product growth. Therefore, it’s important to delegate your financial risk management to the appropriate individuals so that you can keep every element of your business organised.
However, hiring a business accountant and more administrative employees can be a significant business expense. Here are a few ways you can implement financial risk management in your business yourself.
Introduce an automated payroll system
Technology is a brilliant way to save money, time, and resources. Use an automated payroll software to increase the accuracy of your finances and enable financial risk management in preventing any manual errors. The system will identify fraudulent activity and notify the necessary people for you. Easy! You can save money on hiring someone to handle your company’s payroll.
Limit your loans
If you are just starting, you may need a loan to get things going. There are various types of loan available for small business – including credit cards, overdrafts, short term loans, long term loans and much more. It’s best to limit how much you borrow and the number of loans you acquire for stronger financial risk management. Ensure you have enough capital to manage your loan repayments and a realistic time frame to repay your borrowed money.
The type of loan and the amount you borrow depends on your financial situation and the industry you’re entering. Only take out a loan that you absolutely need to launch your business – consider whether you could use your savings first.
Create a plan for your spending and budget across departments
You will often need to show proof of a business plan when you apply for a loan. However, you can also use this plan to outline your budgets for the different departments of your business. Identify your short term and long-term goals as well as any challenges you expect to face.
Try to stick to these budgets in the first few months of your company and review them frequently for financial risk management. You may find one area of the business costs a lot less than you initially expected – while another is skyrocketing. Even when you feel like your original budget is way off, make sure to rejig the numbers and look at your accounts. Whatever you do, do not bury your head in the sand and lose track of spending.
Diversify your revenue streams
You need multiple revenue streams in your business, such as multiple clients, products, or branches. If one collapses, you have a backup and a way to keep paying your bills and employee salaries.
2. Financial risk management with insurance
Although insurance doesn’t completely reduce risk, but it helps the small businesses by supporting them from taking the entire financial burden that is associated with either defective inventory or an employee that has been injured, and thus reduces the risk of the business folding. We need to seriously consider insuring our inventory, the company property, business equipment and vehicles and also maintain a workers compensation policy. What about insuring the business owner’s life, or disability and sickness insurance? There is digital insurance (in case you are hacked), there is management insurance (in case one of your staff makes a mistake), there is professional indemnity insurance. Talk to your insurance broker to ascertain what you need or if you’re on a budget what is most critical?
3. Expand the offerings of the business
Whether the business is involved in deals with services or tangible goods, the more the number of offerings provided, the less the amount of risk because of the availability of backup sources of funding. If a business depends on just one single product, there is a higher probability that it may shutdown once the public loses interest in their product or alternatively a large competitor takes over the marketplace or there is government or legislative change which hugely affects that business. You know the expression – don’t have ‘all your eggs in one basket’.
4. Stick to short-term commitments
Until and unless a small business is a strongly established, long-term commitment which includes mortgages or car lease payments needs to be avoided. Private automobile usage can help to reduce the business costs and also the initial risks because the upfront investment of cash is not required. Be realistic, if the business doesn’t take off as expected, are you locked into long-term commitments you cannot afford?
5. Practice safety for financial risk management
Ensure that you take all safety measures when it comes to your employees. Safety precautions are also important for your inventory protections such as installing security cameras, burglar alarms, sprinkler systems and smoke detectors. This needs to be taken care of mainly because small businesses face the biggest risks when it comes to employee injuries and major loss of inventory based on preventable disasters.
6. Review the existing system of the internal controls
Internal controls provide regular checks and balances for every single aspect of the company. Internal controls can be as simple as having a checklist of precautions before one enters the work area. This is especially with regards to safety issues for the employees. With regards to finances, it could be, for instance, placing different employees in charge of factors such as approving payments or signing cheques, or authoring supplier contracts. Small businesses face the biggest risks when it comes to theft and fraud; due to often lax or no systems or accountability in respect of money. Limit the number of users who can use the internet. In this way, you can reduce the operational risk of having way too many employees conducting personal business during work hours. Don’t underestimate the value of staff training when it comes to risk reduction.
7. Create a financial risk management plan
Having sufficient insurance is not enough to secure your business. Proactive steps need to be taken to cross-train in order to avoid risk. For instance, you can have two people working on the same job. Thus, in any case, if one of the employees leaves without notice, the other employee can always take over and look after his or her job. Thus, the job wouldn’t suffer or worse, clients leave due to lack of service. In small business this is hard as often only one person fulfils many roles. If you cannot handle having double coverage, you can have an extra weekly staff meet up to keep the employees up-to-date on what is happening and ensure documented processes or systems are kept up to date.
8. Work with an internal control consultant
This usually refers to a professional outside your business that will review your systems and investigate the weaknesses, if any, with your company’s processes. An outsider, with a fresh set of eyes, will be able to give the right judgement when it comes to viewing the operations of the business and will also provide unbiased opinions that will help the higher officials to look after and identify the areas of improvementmore effectively. I often perform this role as part of my duties as a business coach. I encourage all my clients to work with me to perform a SWOT analysis which focuses heavily on the weaknesses and threats, with strategies to address and combat them as much as possible.
9. Planning
Having a solid business plan and marketing plan also reduces risk. If you know what you’re doing, have a strategy and plan (not just a dream where you wander aimlessly), this will give you a better chance of success. Having expert advice and a documented action blueprint has been proven time and time again (statistically) to give a business a better chance of success with financial risk management.
