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3 ways to manage risk when starting a small business

December 14, 2019 ​​ 3 min read

These three strategies can help increase your chances of success and make you the prosperous business owner you dreamed you’d be.

1) Make careful financial projections 

As an entrepreneur, you may be giving up a career and a steady paycheque, and putting your personal savings on the line. So there’s a lot riding on the financial model for your startup.

But no matter how much research goes into your business plan, and how carefully you build your projected income statement to reflect your likely sales, costs of goods sold, operating expenses and profits, you can’t be completely certain you’ve accurately estimated your total expenses, the size of your market or your revenues.

It’s a good idea to develop several scenarios, for example: the most likely, the optimistic, and the conservative. Make sure you’re reasonably confident that your business will be viable even with the most conservative model. Search the Internet for tools on how to make financial projections for your business.

2) Monitor your cash flow 

Cash will flow out of your business for things like inventory, supplies, services, utilities, rent and loan payments. If cash coming in from sales exceeds cash going out, your business is cash flow positive and viable. But if the inflow lags the outflow, you are cash flow negative. Eventually, you’ll run out of cash and be unable to pay your bills. That’s one of the most common reasons small businesses fail. 

Even if you’re making sales, if you invoice customers after you’ve delivered your product or service and they don’t pay promptly, you can run into a problem. Accounts receivable is an asset, but it isn’t cash that you can use to pay bills.

You’ll want to keep a close eye on current cash flow and compare it with your projections on a regular basis, so that you can spot an issue and deal with it before it becomes serious. If your cash flow is likely to be cyclical or variable, consider getting a line of credit or some other arrangement to get you through the pinch points.

3) Make sure you have adequate insurance 

Insurance can protect you from a variety of risks that could harm you financially and reputationally, or interrupt the operation of your business. Fires, floods, personal injury lawsuits, equipment breakdown, and crime—including cybercrime—are just a few examples.

A commercial insurance professional can help you consider the things that might go wrong, prioritize them, and recommend cost-effective ways to handle situations that you could not easily handle using your own resources.Common policies for small businesses include commercial general liability, commercial property, home business and business interruption.

Let’s face it—it’s hard work starting a business and can be just as hard to run it. Although you’re never 100% free from challenges and risks, there are things you can do in anticipation to protect you and your livelihood. The key is to put those strategies in place during the calm and peaceful days and not when the storm hits.

Other topics to explore:

 6 things to know when buying commercial property
 The value of partnerships in growing your business
 Is your business ready for the unexpected
 Where to find financing for your business