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7 Risks of Business Ownership You Must Know!

January 22, 20233 min read

7 Risks of Business Ownership You Must Know!

Owning a business is risky. There's no guarantee that you will be successful, no matter how good your product or service is. Before you take the plunge into entrepreneurship (or even if you already have), you need to be aware of the different types of risks that can help or hurt your business viability.

Risk #1: Economic Risk

Economic risk is the risk that a downturn in the economy will hurt your business. This type of risk is beyond your control. While you can't perfectly predict or prevent economic downturns, you can plan for them by having a strong cash reserve and diversifying your customer base.

Risk #2: Industry Risk

When you're in business, you're also exposed to the risks faced by your industry. For example, if you're in the retail industry, you'll be affected by changes in consumer spending patterns. If you're in the coffee business, you'll be vulnerable to fluctuations in the price of coffee beans. Research shows that ~70% of a company's performance can be attributed to how well its particular industry is doing.

Risk #3: Company Risk

The choices made by management in planning and execution will directly impact your ability to be successful. For example, if you're in a high-growth industry but your management team is not willing to take risks, they may miss out on opportunities that could help your business grow.

Risk #4: Time Risk

The longer you are in business, the more time you have to weather difficult times. This is why it is important to have a long-term vision for your business. If your only goal is to make a quick profit, you are more likely to make decisions that are short-sighted and therefore increase the probability of failure.

Risk #5: Liquidity Risk

Liquidity risk is the risk that you will not have enough cash to meet your financial obligations. This can happen if you have too much debt, if your customers do not pay on time, or if you do not get paid quickly enough by your customers. To reduce this risk, you should aim to collect revenue from your clients at least 2x+ faster than the time to pay your vendors (for example, collect revenue within 15 days and pay vendors with 30 or 45-day terms).

Risk #6: Financing Risk

Financing your business can be important for its success. For example, if you use short-term financing for long-term projects, you may find yourself in a difficult position if the interest rates on your loans increase. When interest rates are low, you should look to lock in the rate for as long as possible, even if this means securing a loan or line of credit before you may need it.

Risk #7: Inflation Risk

Inflation can cause the cost of things to go up. This is because prices usually go up faster than inflation. So, it is important to know how your customers feel about price increases (this is called price elasticity). Inflation can also reduce the amount of money people have. This might mean they buy fewer things from you. To help protect your business from inflation, make sure you have a good profit margin and some money saved so you can deal with the effects of inflation.

There is no way to get rid of risk altogether, but understanding the different types of risks you face can help you plan for them and make informed decisions about how to protect your business.

Tim Calise

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