16 Ways Small Businesses Can Tackle Financial Risk Management
Risk management is at the core of financial planning for businesses—especially small businesses. As the…
Risk management is at the core of financial planning for businesses—especially small businesses. As the recent pandemic and economic shutdown have shown, it’s important to prepare for both expected risks and surprises.
Small businesses need to get a better grasp of financial risk management to navigate current market uncertainty and prepare for the post-pandemic future. To help, 16 experts from Forbes Finance Council share valuable tips to help you get a handle on future risk management, as well as important financial risk-management strategies to adopt right now.
1. Consider agility.
Small businesses need to consider agility as a core principle of their business model and risk-mitigation plan. It is impossible to foresee the future, so the next best thing is to craft your business so that it can quickly react to changes in the environment. For every piece of infrastructure, you should ask, “What else can we do with this?” For every expense line, ask, “Does this scale down if revenues decrease?” or “Can this quickly scale up if the market presents an unforeseeable opportunity that we can capitalize on?” We coach our entrepreneurs to think about agility just as much as they think about efficiency, and as a result, they are much more resilient. – Rocky Stubbs, Excelsior Dynamic
2. Get informed and seek advice before acting.
Most small businesses are experiencing significant financial risk. However, organizations must not rush into action without having better information. Before making big leaps, learn more about potential financial options and seek the advice of a trusted third party such as a colleague, a friend or a professional financial adviser. – Maria Allen, Unisys
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
3. Focus on employee education.
I think that Covid-19 has shown the importance of proper business planning for small businesses. Cash management, risk tolerance and employee education should be of utmost importance moving forward. Our team works with many retirement plans, and our most successful ones have an education plan in place for their employees to ensure they make sound investment choices with their retirement funds. – Steve Gansler, Janney Montgomery Scott
4. Consider the inputs and outputs.
“Financial risk management” is a fancy way to describe how one understands the inputs and outputs of a business. Here are some questions that every business owner needs to ask themselves: “What happens if the revenue drops to zero? What happens if I can’t pay my suppliers? What happens if my suppliers don’t pay me?” – James Garvey, Self Financial, Inc.
5. Understand business versus financial risk.
Begin by understanding the differences between business risks and financial risks and how a business can manage each, respectively. Leverage free online resources, such as Investopedia and the Small Business Administration, to identify the financial risks your small business bears and the best practices for insulating your business in the case of a large-scale downturn. – Stacy Francis, Francis Financial, Inc.
6. Form peer networks.
One thing a small business should do to better understand risk management is to leverage the experience of others. Engage other small-business owners. Form peer groups to brainstorm and learn from one another. Listen to other business owners’ stories about their challenges, what they learned, what they are doing and how they overcame them. – Amir Eyal, Mylestone Plans LLC
7. Focus on the future, not the past.
It’s so easy as a small business to look at lagging indicators or look back at the year to see how you did. This is not the best way to run a business and manage risk. The better way is to work with your accounting team to take a proactive approach. What is your cash flow going to be? What is your revenue going to be? Focus on the leading indicators and the future, not the past. – Bill Keen, Keen Wealth Advisors
8. Use available tools to track a variety of data.
Most small businesses underestimate the need for timely and accurate data because they think it is too hard to obtain. But with the tools available today critical data is easy to come by. You must track your cash on hand, your cash burn, your average days to collect accounts receivable and the number of days until accounts payable is due. You can then test to see when cash will run out if AR collections are delayed or revenues decrease. – George Souri, LQD Business Finance
9. Leverage online resources and mentors.
Google it! There are plenty of online resources for small-business owners to learn more about managing financial risk. Leverage mentors! If you have experienced business owners in your contacts list, hit them up. No one can give you better advice than someone who’s been through a crisis before, and if you’ve been in business longer than 10 years, you’ve been through a crisis. – Rachel Fisher, VSC
10. Set up an accessible credit line.
Always have a line of credit available during times of financial stress. Just as with personal finances, a business should have an emergency nest egg—ideally with six months of expenses saved—or an accessible line of credit. When a high-risk situation such as Covid-19 strikes, this accessible cash could be what bridges the gap between staying open or closing your doors for good. – Jared Weitz, United Capital Source Inc.
11. Don’t rely on help from banks or the government.
These times have proven that small businesses are really on their own—as much as the big banks and governments say they want to help, where are they now? So my opinion is you should learn as much about your financial cost centers as possible and reduce fees wherever you can. For example, you can save on merchant fees and gain on interchange through your own payment systems. – Diana Fletcher, DCR Strategies Inc.
12. Track your burn rate.
Track your burn rate and always maintain at least three months of burn, even when expanding. Expansion usually pushes people to the limit, and while it is rewarded most times with growth, it also leaves you more vulnerable than usual. To avoid this, always keep some operational cash saved for emergencies that you do not tap into for expansion. – Felix Hartmann, Hartmann Capital
13. Take a look at your working capital.
As a small-business owner, you might have relatively limited cash reserves. Now more than ever it is important to have a thorough look at your working capital. You will benefit from agile financial solutions, which can help you cope with due liabilities and secure your business through changing times. In this way, you stay agile during uncertain times and avoid harmful downsizing of activities. – Mads Andreas Olesen, MXNEY.io
14. Implement a ‘stop-loss’ formula.
In trading, we manage risk with something called a “stop-loss.” I believe we should all have a “stop-loss” in our businesses. It has to be based on a formula. For example, if you lose X amount of money, you need to stop spending Y amount until you get to Z result. Be clear on your strategy. You can create a report or an Excel sheet where you follow these numbers. – Gabriela Berrospi, Latino Wall Street
15. Leverage stress-test modeling.
It sounds like a cliche, but now more than ever, it’s so important for companies to plan for the worst and work toward the best. A way to do that is stress-test modeling. When creating forecasts, run several scenarios—including ones with Covid-19 level economic impacts—to see how your business would be affected, and have contingency plans in place so you are as prepared as possible for all outcomes. – Zack Cook, Rigor
16. Have three to six months’ operating expenses in cash.
Risk management is not just about insurance. For years I’ve advised businesses to have three to six months’ operating expenses sitting in a cash position to weather financial storms. Those that did so were better positioned to survive the Covid-19 crisis and may have been able to deploy these cash savings for strategic business growth. – Justin Goodbread, Heritage Investors