As a business owner, the first thing you should be concerned with during every stage of your business journey is knowing and understanding your financial risk.
The excitement of starting a business can make it easy to turn a blind eye to the financial risks associated with a startup, while at the same time a seasoned business owner may let past experiences cloud their judgment.
With any financial reward, they will always to some level of financial risk. But being aware of these risks will help you be prepared to make the best decisions for your company.
So let’s look at some potential financial risks:
1 – Financial Forecasting
The success of your business in the early years will be found in your planning. You need a rock-solid business plan that includes a financial forecast.
It’s very easy to get swept up in the moment and lose control of the company’s financials.
Whether your goal is to meet with a Venture Capitalist and seek outside investment or not, having a financial forecast in place helps to ensure that you understand the company’s current financial state. And then based on those current conditions you can more accurately project into the future.
Failure to plan is planning to fail.
By planning your financial projections, you minimize the risk of blind spending. Before starting a business venture, meet with a financial adviser to ensure you have all your financial ducks in a row.
2 – Product or Service Viability
Just because you believe it’s the world’s greatest product or service and it’s going to solve all the world’s issues (and it just may), does not mean other people will concur with that opinion.
Every product or service you offer comes with some type of financial risk. If you aren’t selling anything and/or making money, you have a hobby, not a business.
Understanding your financial risk when it comes to every product is vital. However, minimizing this risk is easy.
In order to avoid large investments on a product or service that won’t sell, do your market research.
Determine if this product or service is actually something your target market would be interested in and what they’d be willing to spend on it. Spending some time and energy on research could save your business thousands down the road.
3 – Secure Business Funding
Many startups, and even well-established businesses, need business funding at some point.
It’s essential you understand your current costs and future costs.
What will this funding be used for?
Hiring additional staff
Now estimate how much additional revenue will be generated. Often a business needs funding to help with short term stabilization of the organization or in order to start their profitable growth stage.
When looking working capital, there are a number of different funding options to consider. Which option you qualify for may be determined by your FICO score, monthly revenue, time in business.
4 – Target Market
How is your target market a financial risk?
It is easy to say your ideal client is x and they spend their time and money on y so they need your product.
You assume all of these things are true so you spend money creating a product and marketing it to this ideal client you imagined.
What happens if the ideal client you thought your product would best serve, isn’t right?
This is where your research comes into play to minimize fiscal risk. When conducting research for a product, include demographic information.
Ask your potential target market where they shop, how they spend their money, how they consume information, etc. Determining the best way to reach your target market helps to ensure you will receive the greatest return on your marketing dollars spent.
While there are many risks involved in launching something uniquely your own, the financial risks are the ones that can make or break your business.
Entrepreneurs are natural risk takers, but understanding and managing your finances properly are one thing you don’t want to risk.