Whenever gurus talk about setting up a business, there’s an implicit assumption that the risks of setting up a business fall on the entrepreneur. But when you think about it, this doesn’t make much sense. For starters, entrepreneurs are usually using other people’s money (venture capital, for instance). And more importantly, limited liability companies protect people from creditors, should they eventually run out of money. In most cases, the leaders of failed businesses aren’t out on the streets because their house has been repossessed.
There’s a clear pattern here: entrepreneurs are not necessarily people who take on risks, but instead spread risks around to protect themselves and their fledgling enterprises.
Although most entrepreneurs spread some of the risks that they face, they may not maximize their opportunities to reduce them all. But if they can, they will end up with healthier and more sustainable businesses. So what should they do?
Risk Reduction Strategy #1: Diversify Income
Relying on a single product might seem like a good idea: after all, you want to make sure that your business does one thing that is better than everyone else. But it turns out that this probably isn’t a good idea, especially over the long term. The reason is that external factors beyond the control of your business could cause a product to lose its value. Technological change, problems with the supply of essential components, or changes in customer tastes could all undermine a single-product business.
Risk Reduction Strategy #2: Get Somebody Else to Manage Payroll
Personnel services are a kind of agency that manages all your payroll and HR needs on your behalf. And while this might save you a bit of time, the main advantage of these services is that they reduce the risks that your business faces.
Companies can be fined extraordinary amounts of money for falling foul of tax rules or employment law. Personnel services provide all the supporting services that businesses need to ensure that they remain compliant at all times. Firms can permanently hire a personnel service and then forget about many of the administrative rules governing the employment of staff and get on with the stuff that they are best at.
Risk Reduction Strategy #3: Keep Loans to a Minimum
Financial risks are a significant issue for some companies. Firms can sometimes fail even when they have a successful product because the cost of borrowing becomes too high. Although it may be tempting to take out loans to expand what seems like a successful business, you need clear proof that your firm can operate at scale before taking out any new financing.
Risk Reduction Strategy #4: Keep Accounts Receivable to a Minimum
Your accounts receivable is that money that clients owe you for work done. It’s important to point out that even though accounts receivable make your balance sheet look healthy, if the money hasn’t actually been paid yet, then you could suffer a cash flow crisis where you don’t have the money in the bank to pay staff or suppliers. Keep accounts receivable to a minimum by enforcing a strict payment collection policy.