The Secrets To Effective Risk Management

Entrepreneurs are often considered risk takers and sometimes even gamblers. This is true and indeed it differentiates entrepreneurs from the rest, those who are not ready to take the risk of believing in an idea enough and creating a business around it. However whilst the risk taking is often glorified by successful entrepreneurs, the risk management put in place to achieve success is often kept secret. A new entrepreneur might be forgiven to think that he or she must risk it all at the beginning to launch a business, but this is not true.

Only risk what you can afford

 

If you are just starting out, chances are that you are going to need funding. Traditionally the main option would have been to borrow from a bank. Whilst this is still a good idea, many people fail as risk management immediately by borrowing more than they can afford. Although as an entrepreneur you need to have a strong conviction that you will be successful, you also need to have the wisdom to understand that sometimes things can go very wrong.

 

If you borrow more than you can afford or more than you can earn and repay within a couple of years as an employee, then you will also have the fear of bankruptcy at the back of your head. The first step of risk management is to always have an out. If you need more money than you can afford look at modern alternatives, such as crowdfunding, equity or angel investors, or finding a partner.

 

Stop treating insurance as an enemy

 

Risk management is only effective as long as you have a way to recover from a disaster within an acceptable amount of time. Insurance is an important tool and although it is considered by many to be an expense, it should be viewed as an non-tangible investment. After all, who isn’t glad of having insurance in a car crash or home insurance when a house is robbed or damaged?

 

Today you can find specific insurance to cover a wide range of disasters, small and large. It would be too expensive to insure your business against everything, but you can prioritise. Start by insuring the key person(s) whom your business depends on and have the basic property theft and damage cover too. As you grow you might want to consider employer liability and equipment protection insurances too. You will find that insurance is a lot cheaper when you buy a tailor made business packet. Make sure to read the fine print and seek legal advice if necessary.

 

Control your cash flow

 

As most things in business, the goal of risk management is all to do with money. If you successfully manage risk you will be able to grow and profit from your business. In order to do that, you need to give your primary focus to cash flow management. The term cash flow is sometimes misunderstood, but it is simply the physical currency entering and leaving your bank account. I mention physical currency because many times people consider invoices as representing money, but they are wrong. Invoices represent a promise to pay, but sometimes it is hard to get paid.

 

Monitor your expenses and your income constantly and be weary of any considerable spending before getting paid by the customer. I strongly recommend you always seek a minimum deposit of 35% for any project so that your cash flow will remain healthy. Remember that in some cases the time between when you receive a purchase order to when you get paid could be as long as six months. You can proactively plan for a healthy cash flow in your business plan. This plan is not a boring document you write at the start of your business. It is a guide which you could refer back to when you need it.

 

Set up multiple companies

 

This process is sometimes associated with criminals and tax evaders, but in reality it is a legal and effective way to risk management. In many countries nowadays it is very easy and cheap to start a new limited liability company. In the UK it costs as little at £15. The main advantage to setting up multiple companies is to limit the risk a disaster in one company will have on the rest.

 

Imagine that you have a PR disaster in one company. Whilst you are defusing the situation your other companies are not affected. If you only had one company then everything would grind to a halt until the situation is resolved. Think carefully which part or parts of your business you can separate. For example you could set up one business to offer a higher end product to wealthy customers and a similar, lower end product to the masses. Of course each business would need to follow local legislation and tax rules, but the extra cost of this could be negligible to your entire business being put on pause.

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The FUN Entrepreneur

Having started my first business at the age of 16 I was always eager to dive into the exciting world of entrepreneurship, but seeing so many others fail I sought ways to succeed, not only by making money, but also by having fun whilst doing it!

12 thoughts on “The Secrets To Effective Risk Management

  • June 12, 2016 at 1:30 am
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    Thanks very interesting blog!

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  • June 13, 2016 at 5:38 am
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    This design is incredible! You certainly learn how
    to have a reader entertained. Between your wit along with your videos,
    I had been almost relocated to start my own blog
    (well, almost…HaHa!) Wonderful job. I seriously loved what you had to say, and over that, the
    method that you presented it. Too cool!

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    • August 8, 2016 at 2:21 pm
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      Hi James we don’t usually allow spam comments such as this, however on this occasion we will make an exception since even busy entrepreneurs deserve to find love! We won’t be allowing any more spam comments in any of our other posts.

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  • September 9, 2016 at 10:25 pm
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    In my first business, I risked more than I should have and lost my life savings. Luckily I was 20 then so it wasn’t the end of the world. I hear stories of people risking their home or their family’s savings and I am flabberghasted! I hope that this article helps many new entrepreneurs not make the same mistake I did, thanks for writing it.

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    • September 12, 2016 at 12:56 pm
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      I’m sorry to hear of your problems, Dawna, but I am glad that you’ve learnt from your mistakes. Feel free to share this article on your social media pages to help your friends who might be new entrepreneurs. Thanks.

      Reply
  • October 4, 2016 at 10:10 pm
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    Hi there! Someone on my Facebook group shared this site with us so I came to give it a peek. I’m definitely enjoying the articles. I’m bookmarking and you will be tweeting this to my followers! Fantastic blog and brilliant design.

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    • October 5, 2016 at 7:36 am
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      Thanks Sherri for sharing our blog with your friends and for your wonderful comments. We love getting feedback on our articles and would like to take this opportunity to thank all our readers and commentators for their support.

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  • October 9, 2016 at 5:45 am
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    An often overlooked aspect of business, thanks for writing this.

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