Every small business faces financial risks. However, you can lower your risks and improve your chances of success when you become aware of several external and internal financial risk factors.
External Risks
Economic Risks
Economic downturns or failures as well as economic changes within certain industries, geographies or demographic groups play a role in your business's success. Any of these changes can decrease income and increase expenses.
While you cannot eliminate or even control economic risks, you can prepare for them.
Strategies
- Strategize ways to combat economic downturns.
- Boost savings during good economic seasons.
- Diversify investments, products and your customer base.
- Pay debts quickly.
- Look for new financing options regularly.
- Continue to innovate.
Legal Risks
Safety regulation updates and tax law changes can happen at any time. You may find yourself facing a mandatory safety system upgrade, an unexpected property tax increase or a government ban on a product you produce.
Prepare for legal risks when you save a cash reserve. It can pay for unforeseen regulation or tax changes. Be sure you stay up-to-date on industry trends, too, so you are better prepared to shift your business model, focus or products based on legal changes.
For help assessing internal systems and compliance, consider a review such as Internal Control Evaluation.
Internal Risks
Receivables
Part of your business strategy may include extending credit to your customers. You give them the product and they have a set time to pay the invoice.
Sometimes, though, those customers cannot or will not pay their bills on time. As a result, you will not be able to pay your expenses.
Consider requesting payment up-front or build a cash reserve that covers unpaid invoices and all your regular expenses. These steps allow you to continue paying your bills, and they protect your business.
You may also explore relevant insurance options such as Mercantile (Lessors Risk Only).
Performance Risks
You have a great deal of control over performance risks even though they vary based on your specific business and its structure and products. Some typical performance risk factors that affect your bottom line include underperforming quarters, bad investments, new competition, planning errors, personnel challenges or quality issues.
These performance risks are often avoidable. Consider implementing several helpful suggestions.
- Save enough cash to cover a slow quarter.
- Decrease expenses and debt where possible.
- Maintain consistent high quality standards.
- Improve your hiring process then take measures to retain quality employees.
- Focus on doing the best job possible so you can confidently face competition.
- Evaluate performance regularly with a mentor and financial advisor.
To better understand market and underwriting relationships that can affect coverage and risk transfer, read more about Cover holders and risk takers.
As a small business owner, you will face financial challenges. However, you can prepare to face both the external and internal factors of financial risk. Make an appointment to meet with your financial advisor and discuss ways to combat these risks and help your small business succeed.
Frequently Asked Questions
How can I prepare for an economic downturn?
Build cash reserves, diversify products and customers, and reduce debt to increase resilience during slower periods.
What should I do when customers don't pay invoices?
Consider upfront payments, stricter credit terms, and maintaining a reserve fund to cover unpaid invoices.
How often should I review legal and compliance risks?
Review regulations and industry trends regularly—at least annually or whenever there is a major business change—to stay prepared.