If you are a small business owner, it is critical that you are aware of the most common financial risks you may be exposed to. Whether you have a brick-and-mortar store or you are running an online business, if you don’t have the right information, you may make poor decisions.
If your business is located in Southeast Wisconsin, especially New Berlin, Waukesha, Milwaukee, West Allis, or Muskego, let Nolan Accounting help with your finances. We specialize in general accounting and bookkeeping, as well as payroll and tax prep. We can help you understand the financial risks you are exposed to and help keep you protected.
Below, we will explore the top 10 financial risks for your small business.
10 Financial Risks for Your Small Business
Underpricing Your Products/Services
Many times, especially in the early stages, business owners set low prices for their products and services. After all, they have not established themselves in the industry, so pricing is the only way to beat the competition.
Then, as your operating costs increase, you will need to increase your prices. After all, you can’t make money if your prices are too low. Unfortunately, this can sometimes cause loyal customers to be offended and may feel like the increase is unfair.
Not Paying Attention to Accounts Receivables
Do you pay attention to how money flows in and out of your business? Do you often give your customers more time to pay? Are you taking unnecessary business expenses? This business model is not viable and will ultimately cause your cash flow to dry up.
As a business owner, your goal is to make money on your products and services. What if over half of your revenue comes from one large-scale customer and you keep extending their credit limit? If they are unable to pay on time, this increases your financial risk because without the money coming in, you don’t have the money to cover your expenses.
When revenue is lost for 2 months, 86% of small businesses must either cut costs or seek supplemental funding. You must pay close attention to your accounts receivables to avoid financial loss.
Getting Unnecessary Loans
Did you know that in 2020, the United States government gave 9 million loans to small- to medium-businesses? These loans totaled $750 billion. During this same period, small businesses had a 14% credit growth. Getting a loan feels good because that extra money opens up lots of opportunities- but you should not get one just because you can.
Banks make money on business loans, so if you want to reduce your financial risk of the additional costs associated with a loan, you shouldn’t get one at all. The same thing goes for taking money from an angel investor.
All funding must be paid back, so you should only raise funds when you have no other choice and when you do, make sure that you can meet repayment terms.
Relying on One Funding Channel
When considering obtaining funding, you need to consider all of your options. In the beginning, many entrepreneurs turn to friends and family- but you do not have to restrict yourself to this channel.
Consider other options such as venture capitalists, angel investors, government support programs, and more. Having some money to fuel your vision is better than having nothing at all. You want to choose a channel that has low interest and risk.
Hiring Employees Before You Can Afford It
Many entrepreneurs hire staff without having the money in the bank to pay them. This typically happens when you believe your cash flow will improve. For example, the bank is about to sign off on a loan or a large-scale customer is about to pay.
Unfortunately, those funds may be delayed, or you may never receive them at all. Even if you have a contractual agreement with the employee and they work remotely, they still need to be paid when they issue an invoice. Therefore, it’s best to avoid hiring employees until your cash flow is stable and you have a reserve in the bank.
Recruiting Staff Without Thinking About It
Many people believe that a sign of a growing, healthy business is increasing staff numbers. However, this isn’t always the case. Several companies are million-dollar companies but have 50 employees or less. Everyone on your staff should be compensated, so it’s critical that you are careful about setting up too many positions to fill.
If you have employees that are not producing anything or making money for your business, they are an overhead expense. Plus, if you grow too quickly, it can be difficult to regulate them. Even if you can afford to add staff, you increase your financial risk and decrease your ROI. Only hire individuals who will boost your business value.
Depending on One Revenue Source
When you are just starting out, you’re likely to have a limited customer base- which is fine at first. However, you must diversify your sources of revenue if you want your business to grow without being concerned with cash flow. If not, the financial risks will be significant if one or more of your customers decide to cancel their services.
Unfortunately, many entrepreneurs get in the habit of serving their early customers and don’t make time to venture into other markets. When they realize they should, these early streams of revenue are thinning.
Therefore, you’ll want to market your products and services to expand your customer base. If possible, use paid campaigns to increase your visibility. At the very least, attend local business networking events and seminars. This will increase your chances of earning more customers.
Not Considering Liquidity Risk
This refers to the risk of ensuring that your assets will transform into cash. This is usually a major financial risk for seasonal businesses that experience lean periods, such as vacation cottages, Halloween or Christmas retailers, snow removal service providers, or lawn care providers.
If the business owner is unable to procure more products or pay staff, it can negatively impact the longevity of the business. In some cases, it results in the business shutting down. Therefore, it’s necessary to monitor/control liquidity as well as consider compliance regulations that could limit the transfer of liquid assets when you want to.
Working with The Wrong Investors
Many entrepreneurs make the mistake of taking money right away instead of taking the time to determine which investors are best for their business. If you decide that you want to accept funding from an investor, you need to consider the type of investor you want to work with, as well as the compliance and background checks.
You want to make sure they can provide you with the funds you need when you have a cash flow issue. Businesses that work with investors willing to offer more capital are more likely to be successful. However, before you say yes, you want to make sure they are financially secure and can raise your bar in the industry.
Operating Without Legal Framework
If you are not compliant with business regulations, it can increase your financial risk for your business. For example, if you don’t quite understand a certain regulation and you don’t submit the appropriate documents to the authority, you will be liable for penalties.
If you’re running an LLC and you don’t properly document LLC activities, this carelessness can discredit your company’s existence. If you have partners, they can sue you for non-compliance. If you don’t meet the terms of a contract with a vendor, they can sue you.
Also, if you are working with remote employees, you must have rules in place and be transparent about what is acceptable when working for your business. You can’t afford to work with employees that are not willing to comply with legalities.
You are in Control of Your Business Finances
Though you can’t eliminate financial risks, being proactive can help. Nolan Accounting can help you understand and maintain control of your financial risks. We work with businesses located in Southeast Wisconsin and specialize in daily accounting and bookkeeping tasks, as well as payroll and tax prep.