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What Is One Way for an Entrepreneur to Decrease Risk?

Date published: February 24, 2023
Are you a new business owner or an established entrepreneur? Do you know the risks of running a business? There is more than one risk to plan for. Keep reading to find proactive ways to decrease business risks.
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“It is not the manager’s job to prevent risks. It is the manager’s job to make it safe to take them.” –Ed Catmull, co-founder of Pixar Animation Studios

Running a business is a journey, and risk is a part of that journey. Do you have every intention of moving forward and turning risks into opportunities as an entrepreneur? What is one way for an entrepreneur to decrease risk?

To lower your risks, you need to take steps to increase your chances of financial success and minimize potential losses. For this, you should correctly assess your situation, identify the potential risks involved, and have the knowledge to overcome them. So, let’s discuss how you can decrease risks through wise financial management.

What Business Risks Do New Entrepreneurs Face?

Owning and running a business is an exciting time, as the possibilities for success are endless. However, embracing new business opportunities also comes with endless possibilities for risk.

Business owners conducting business reviewBefore jumping headfirst into entrepreneurship, thoroughly and objectively weigh your likelihood of achievement against the reality of setbacks you may face.

Types of Risks

When operating a business, entrepreneurs face more than one risk, including:

  • Competition: new entrepreneurs risk entering a saturated market, making it difficult for their young company to stand out among the competition. Even established entrepreneurs risk losing their competitive edge to innovative new companies.
  • Bankruptcy or Insolvency: when your company cannot repay its debt, there is a real possibility of bankruptcy.
  • Economic: inflation, rising interest rates, volatile energy prices, geopolitical instability or conflicts, supply chain disruptions, and labor shortages create economic risks for entrepreneurs.
  • Environmental: extreme weather may increase insurance costs or cause damage to property and resources.
  • Financial: these risks can be caused by instabilities and losses in the financial market. They refer to how your business can manage debt and fulfill financial obligations, such as credit, liquidity, and operational risks.
  • Political: a change in government, legislative bodies, or policymakers can negatively affect your business. For instance, politics can affect your company in terms of taxes, licenses, and stricter regulations.
  • Reputational: these risks have the potential to damage the public's perception of your business. For instance, a breach of your customers' data can negatively impact your company’s reputation.
  • Security and Fraud: these risks involve unexpected financial, material, or reputational loss at your company caused by a fraudulent action.
  • Strategic: factors such as mergers and acquisitions, market or industry changes, customer demand, financial issues, and new regulations can disrupt your business. As a result, it may become challenging or impossible for your company to achieve its objectives and strategic goals.

How an Entrepreneur Can Decrease Risk

Entrepreneurship is intertwined with risk-taking and risk elimination. After all, there’s no progress without risk-taking. The ancient Greek historian Herodotus said, “Great deeds are usually wrought at great risks.” And this is the answer to “why do entrepreneurs take risks?”

According to the U.S. Bureau of Labor Statistics (BLS), about 20% of new businesses fail during their first two years, 45% during the first five years, and 65% during the first 10 years.

However, proper financial management can help you reduce risks, thus being critical to your success. 

Conduct Wise Financial Management  

According to a recent Goldman Sachs small business survey, 76% of business owners say their business’s financial health has been hurt by inflation. Today, it’s more critical than ever to be able to navigate the complex world of business.

Business owner budgetingSo, what must an entrepreneur do after creating a business?

Build a Strong Financial Plan 

A financial plan describes your current finances, financial goals, and strategies necessary to achieve those goals. You should include details about your cash flow, savings, debt, investments, insurance, and any other element related to your finances. 

Take the time to build a solid financial plan by calculating how much money you have and how much you need to start your business or for a specific business venture. Then, see what costs you can cut down and what expenses you can’t avoid. 

Create a Realistic Budget

Cast a realistic look at your budget and costs. Otherwise, you won’t be able to have enough money to overcome hard times. Take into consideration your business plan and cost projections. Then, build a realistic budget based on how much you can spend on fixed costs and payroll.

It’s vital to keep track of your finances from the very beginning so that you won’t end up overspending. Consider using a spreadsheet with sections for each month that include expenses, cash flow, and profit or loss estimates. You can also add columns for any extra revenue streams you may have.

Manage Financial Risks 

Financial risk management is ultimately the process of detecting, managing, and mitigating financial risks. 

Being transparent, budget-oriented, and accountable are some of the small business owner’s character traits that can be the difference between success and failure. And all these traits are essential when it comes to financial risk management. 

Managing financial risks means: 

  • Identifying and measuring the risks
  • Figuring out the risk level you can accept
  • Considering insurance that can protect your business against risks
  • Determining potential cash flow issues
  • Reviewing your financial arrangements with creditors
  • Diversifying your income sources
  • Applying regular reassessment of risks

Apply for Reliable Financing

If you find that your business lacks liquidity, you may need to seek business loans or other financing options. However, borrow money from a reliable small business funding company only if it’s necessary.

Newer businesses in need of additional working capital can apply for startup funding. Established businesses may choose a merchant cash advance (MCA) to help with quick access to the necessary working capital. 

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Specifically, a merchant cash advance isn’t a loan. In this case, you borrow against your future earnings. You’re expected to make the repayments within the next several months through a portion of your credit card sales.

The maximum funding amount will be determined by the provider and can be up to $200,000 with a funding term of nine months. The main benefit of an MCA is that bad credit businesses or those with a limited credit history may be approved. Additionally, an MCA doesn’t require collateral, and you can receive your funds relatively quickly.

Conversely, if you are not a startup, you can apply for a traditional bank loan or a small business loan. In most cases, the requirements for these types of financing will be higher. For instance, most lenders will require the company to be in business for several years and to provide financial records for that timeframe.

Reduce Overhead Expenses

An entrepreneur would most likely be interested in reducing overhead expenses. And a big part of this is cutting your rent, ad-related costs, staff size, and salaries. 

By applying a low-budget approach, calculate your costs and identify areas where you can cut costs without significantly diminishing quality and service. For instance, you may find that outsourcing your customer service or IT department can lower your expenses without sacrificing the quality of service.  

Save Money

What is one way for an entrepreneur to decrease risk related to finances? You need to save money for a rainy day. It’s vital to create an emergency fund in case your business gets into hot water. So, make sure to set aside a particular amount for your savings.

Moreover, your savings can also help you expand your existing business without looking for investors. For example, you can set aside at least three months' worth of business expenses. So, if your business expenses make up $150,000 each month, try to save up about $450,000.

Specifically, consider making a plan of where you started and how much profit you plan to make. Don’t forget about a backup plan. As a result, you’ll stay accountable and make well-thought financial decisions.

Moreover, you can cut the finances spent on paid ads, especially when you don’t get the expected results. Instead, try low-cost or free advertising, such as social media content creation, blogging, and email marketing.

Bonus Tip: PEARL Method of Reducing Entrepreneurial Risk 

It’s common for all entrepreneurs to encounter risks on their way toward growth. However, you can follow the PEARL method to cut entrepreneurial risk as you start and run your business.

Business owner conducting financial planning PEARL stands for “Plan, Execute, Assess, Reflect, and Learn.” 

  • Plan

Plan your steps based on thorough research. Measure your success. Always use metrics to see if your plan is working. For instance, businesses use quantifiable measurements to track the effectiveness of their marketing strategies. Success metrics are also called key performance indicators (KPIs). For example, measuring organic search leads is a KPI that helps measure how many people are browsing your website and online advertisements.

Also, connect with other business owners. A network of business partners and associates can help you draw energy and stay motivated. Networking with others who share a common enthusiasm and way of achieving goals can help you learn from others’ success. Of course, networking is also a great way to build business partnerships and relationships, which are useful in business expansion.

  • Execute

When moving forward, weigh all your options and make informed decisions. The execution of your plan and business strategy should be based on your sales data, bookkeeping, and any other data available. These can help you review the impact of your plan and strategy. 

For example, you need to determine key performance indicators during the strategic planning stage and define your success numerically. This way, you and your team can regularly track and monitor performance and decide on specific changes based on that progress.

  • Assess

You can’t succeed and reduce risks without making assessments. For this, you need to follow sales trends, spending trends, and any emerging trends in your field. You should study them and see how they can help you improve your current strategy. For instance, you can join industry associations that organize various networking events. Also, you can take their training courses or join their online communities to stay in the loop on new market changes or developments.

  • Reflect 

Is your business moving in the right direction? If yes, keep doing what you’re doing. If not, there is no need to worry. Just use your mistakes to learn lessons and gain experience to move forward with greater success. As Oscar Wild said, “Experience is simply the name we give our mistakes.”

  • Learn

After you’ve planned, executed, assessed, and reflected, get down to applying all the information gained and lessons learned to your next move. Learning from mistakes can help you become even better at what you do, thus minimizing the risks of failure. 

Sum Up

What is one way for an entrepreneur to decrease risk?

You need to maintain good financial management in your business. 

Risks can create a large barrier for any entrepreneur who wants to achieve success. As a result, entrepreneurs should be risk mitigators. To reduce risk, aim for success, and minimize losses. Also, you need to plan wisely in terms of budgeting and creating a realistic business plan. Finally, you can apply the PEARL method of proper planning, execution, assessment, reflection, and learning. 

Ethan James   Lead Writer
Ethan James is an experienced Financial Writer at Lendza with over a decade of experience.