What are the risks of starting a new business?

Before you dive in, understand the risks of starting a new business

Thinking of starting a new business? Exciting.

Bet you’re feeling a bit nervous too though, right?

That’s a good thing. There’s a whole load of opportunity out there for start-ups. But there are some high-stake risks, too.

So, before you dive straight into the deep-end of the start-up pool, take some time to understand the risks involved.

You’ll feel a whole lot less anxious. And it’ll up your chances of success if you’ve decided how you’ll approach them early on. 

Out of pocket – financial risk

Most kinds of risk have an impact on a business’s finances, either in extra cost, or lost revenue. But financial risk’s the big one.  Especially at start-up, as most new businesses need investment.  And often, it’s not just your own money you’re risking, it’s outside investors’, too. 

Financial risk is all about the money flowing in and out of your business, and the possibility of sudden loss. So if, for example, most of your income is from one particular client and you decide to extend their credit, what happens if they don’t pay?

Or, what if interest rates suddenly increase overnight. Where will you find the extra cash to cover your repayments?

Playing by the rules – compliance risk

It’s not just the big, corporate players who need to stick to their industry’s rules and regs. Compliance is just as important for a one-man band.

Break the rules and there’ll be consequences. Like fines, lawsuits and damage to your reputation. And as your business grows, there’ll be more rules to comply with. Ones that didn’t apply before. In most states, for example, the minute you hire your first employee, you’re required to have workers’ comp insurance

But even if your business stays the same, you could get hit with a new rule. Laws change all the time.

A new data protection act, for example, poses a compliance risk, plus extra cost. To make sure you meet the requirements could mean investing in better website security and staff training.

Full working order – operational risk

Operational risks are things that might happen during the day-to-day running of your business to interrupt it. They might be down to people, processes, or external events – like natural disasters, or power cuts.

They might seem minor. But they can still hit a small business hard.

What if your server suffers an outage because of a power cut? How will you take orders? Or get them out? How will your customers get hold of you?

If you can’t do business, you’re losing money. But you won’t just lose revenue, you’ll lose face. And your reputation is priceless.

What’s in a name – reputational risk

Everything. No matter what business you’re in, your reputation is your biggest asset.

The opinions of your clients, investors, partners and the general public can have a huge impact on your firm’s revenue.

Damage your reputation and customers will be wary of buying from you. Suppliers may not offer such favorable terms. Staff may quit and prove tricky to replace. Influencers and promoters may withdraw their association with you.

What if you’re hacked and lose customer data which should have been password protected, but wasn’t? Or, a customer gets food poisoning at your restaurant and takes to social media to complain? How will you respond?

Reputational risk can surface in the form of a lawsuit, a product recall, or negative publicity. These days, it doesn’t even have to be a major event. Just a series of unfortunate tweets.

Best laid plans – strategic risk

Often confused with operational risk, strategic risk is not the same thing at all.

Operating well, means doing things right. Good strategy is about doing the right things. Strategic risk arises from poor decision-making.

Every successful entrepreneur knows the importance of having a well-thought out business plan. A key part of that plan is having a clear strategy to achieve your goals.

But things can change. And fast. So that, even with the best-laid plans, you can find yourself suddenly having to deal with an unexpected challenge to your business strategy. One that might result in losses.

What if there’s a sudden advance in technology? Or, a strong new competitor appears in your market? What if there’s a downturn in demand for your particular product? Or, an upsurge? How would you cope with a spike in the cost of your raw materials?

The trick to dealing with strategic risk is to analyze the situation. Weigh up the pros and cons of your next steps. And be ready to adapt.

Taking steps – risk management plan

Getting your head round the risks your start-up will face is the first step. The next is your risk management plan.

Take a good, long look at each type of risk. Work out what specific things could go wrong. And the impact they could have on your business.

It’s no use saying ‘there’ll be some financial risk involved’. You need to be explicit. Think about worst-case scenarios. Analyze their potential impact. Then you can come up with a strategy for dealing with them.

Ask yourself how you’ll manage if a customer takes months to pay. Have you got back-up options if your main supplier lets you down? Do you have enough business insurance

Cover up – business insurance

Every risk management plan should include insurance as one of its elements. Part of the plan is working out how to reduce the financial impact a risk might have on your business. Having the right coverage can help take care of these costs.

And then?

Take the plunge. Because the biggest risk may be not taking any risk at all.

Image: Creative Commons ‘woman dives into sea’, Pexels.

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