If you are an entrepreneur managing a business, be it a small start-up or a large conglomerate, there are inherent risks involved in doing business. Indeed, the returns from your hard work in the business are greater than what one would get in a 9-5 job.
Having said, the risk is also much higher in a business owing to a lot of uncertainties. It exists independent of the geography you operate in.
In the UK, there are multiple options for 12 month payday loans from direct lenders to start or expand one’s business. You can easily get these unsecured loans even if you have a substandard credit history.
Despite getting funds easily, there is risk involved on the part of both the lender and the borrower. The borrower might face business risk, and the lender faces credit risk.
Planning for Risks Management
The risks can be internal or external, it can be a company-specific risk, it can be an industry-specific risk, it can be a country-specific risk, and it can be a regulatory risk. It can be further classified into operational risk, financial risk, economic risk, sovereign risk, strategy risk, compliance risk, reputation risk, to name just a few.
Let’s see how you can tackle and manage some of these risks to take your business to greater heights. Here are some of the time tested strategies:
- Risk Management Plan
Start by creating a risk management plan wherein the first step is to identify all the potential risks involved in your business. Now the next step is to prioritize these risks in order of their importance and probability of occurrence.
You can avoid, reduce, or share the risk, prepare a plan on what to do with each type of risk. Formulate contingency plans and have multiple backup plans in place to tackle the crisis efficiently.
For instance: If there is ever a situation of data theft in your company, then every employee of the company must be well aware of what to do in this situation.
- Risk Means Opportunity
Entrepreneurship per se means taking the risk, so it is an inevitable part of your operations. However, what you need to realize is that with risk comes an opportunity, an opportunity to take advantage of, and grow.
What many management Gurus call as “First Mover Advantage” is itself a risk wherein the entrepreneur saw growth opportunity in an unexplored area.
For instance: Elon Musk was talking of going to Mars and naysayers were mocking him, he invested heavily to realize this dream, took the risk and look where SpaceX is today. As a business owner, you need to think beyond risk and identify opportunities in every situation.
Did you know that you can even insure a pen used in your office? Insurance is an excellent tool for risk management in both your personal and professional life. Sure, you have to pay the premium on regular intervals which is a cash outflow, but the potential upside outweighs that cost.
Suppose you have built a new manufacturing unit by investing millions on land and machinery. Still, you insured it, if unfortunately, it catches fire then you will get the insured amount. For data breaches and other cybercrimes in IT companies, there is a provision of cyber insurance these days.
In a nutshell, insurance is an effective risk mitigation tool which transfers the risk to the insurer.
- Limit Debt Obligations
Taking a business loan or raising money via bonds is common instances in any capital intensive business. Companies go to loans to raise money for working capital or expansion plans. However, taking debt is inevitable but repaying it quickly and reducing liabilities is another way to mitigate risk.
Debt on your books should be as low as possible; otherwise, with higher debt and irregular cash flows, your company is perceived to be risky by investors and even lenders.
Your solvency ratios in the likes of debt ratio, debt to equity ratio, financial leverage, debt service coverage ratio, long-term debt to equity ratio should be equal to or less than the industry average. Otherwise, you will have an adamant time getting fresh loans from any conventional commercial bank in the UK.
- Stay Away from Risky Customers
If you are in the business of a bank or a direct lender, then as a risk management strategy, you should identify and distance yourself from risky sectors and companies to lend.
If you are in some other business then also stays away from risky customers who usually delay in making payments, or their check gets bounced frequently. It will be suitable for your day sales outstanding and cash conversion cycle.
There is no returns without taking the risk, but sometimes it is better to play safe than to go all guns blazing in a risky territory aggressively. The bottom line is that the risky customers pose a significant risk to your cash inflows, and thus you should be wary of that.
- Controlled Diversification
This usually happens after a business is thriving in one geography and want to emulate this success in other geographies. It also happens when a company wants to diversify to other industries after tasting success in its original industry.
You should carefully study the market and conduct independent market research by a third party about the new geography you want to expand or the new industry you want to enter. It is because any of this diversification involves humongous investment both in money and time, which significantly increases the risk.
Thus, to avoid this risk, you should carefully analyze your product’s demand in the region you want to enter or your USP, which will help you establish in a new industry. It is essential to know what you are good at, and even more important to know what you are not good at.