There’s no doubt that starting a new business has risks.  While it may be tempting to remain positive and ignore them, you need to know how to reduce the financial risks when launching a new business.

Risk management is the process of identifying and assessing risks and developing strategies to mitigate them. A risk management plan is an important part of your overall business plan. By understanding potential risks to your business and finding ways to minimise their impacts, you will be giving your business the best chance of success.

Here are some actions to consider when preparing your risk management plan that may help reduce the financial risks of starting a new business.

Develop a Business Plan

One of the first steps to help reduce the financial risks of a new business is to develop a business plan.

You need to know how much time and money you are going to be investing in your new business. In addition, market research should be undertaken. This gives you an idea of whether your new business has a chance at success.

Perform Quality Control Tests

You should implement customer service reviews of your products or services before offering them on a wide scale. Organise a test group so you can make any improvements before launch. This will give you a greater chance of success in your venture. It helps to avoid launching a product that is going to need major work in order to be viable.

Keep Good Systems

By bringing an accountant or bookkeeper on board early, you’re able to establish record keeping systems that work from the very beginning. If you create a system and keep up with paperwork, it can save you both time and money when it’s time to pay your bills or file your taxes.

Limit Loans

If you must start out with a business loan, make it as low as you can comfortably manage while still providing enough capital and backup to ensure success.

The amount you need to borrow depends on your personal financial situation and the type of business you are creating.  To reduce your financial risk, only take out a loan if you need to, and try to keep it as low as you can. If it is possible to fund your business without loans, that would be the ideal scenario to reduce financial risks.

Keep Accounts Receivable Low

In order to stay in business, you need to keep track of your accounts receivable and make sure your customers are paying invoices on time. Your success or failure depends on the ability to create and maintain cash flow.

Diversify Income

Whenever possible, ensure your income comes from more than one source. If your business doesn’t survive, having a Plan B to keep you out of bankruptcy makes good business sense.

Buy Insurance

Purchase insurance that is most appropriate to your individual business.  Seek the advice of a professional adviser to ensure you have the right cover to protect your business.  Although there may be quite a large financial outlay involved, the peace of mind it brings is well worth the cost if it protects you from losing everything.

Save Money

Save as much money as you can. Build up some reserves as “insurance” in case disaster strikes and you must close shop. This means you may need to focus on improving your personal finances and having your own personal emergency fund before you start a business.

As an entrepreneur, you can’t do anything about the number of new businesses that fail each year. Nor can you 100% guarantee that your own success will succeed. However, you can take steps to reduce the financial risks of your new business, giving it a greater chance for success.

If you’re interested in learning more about risk management before you start your own business, visit our website or call 1300 ARABON.