15 Expert Tips To Help Small-Business Owners Better Manage Financial Risk

Financial risk management is crucial for the success of all organisations but is especially important for small businesses, which generally operate with thinner margins and smaller financial reserves. Mitigating against known risks and preparing for the unexpected can help steady a company in even the most challenging situations. Therefore, it’s wise for entrepreneurs to bolster their understanding of financial risk management.

While it can be a complex topic, there are also smart, simple strategies that small-business owners can deploy now. To help, 15 experts from Forbes Finance Council share their top tips for entrepreneurs looking to better manage their financial risk.

1. List Your Current Weak Points

Outline the weaknesses in your business. What are your monthly fixed-cost cash needs? Do you have vendor options if someone goes out of business? Will you have to sell something that is “nice to have”—or “need to have”? Once you know your weak points, you can establish plans to address them. This could mean building a cash reserve, finding a backup vendor or changing your inventory mix. - Chris Tierney, Moore Colson CPAs and Advisors

2. Keep Operations Lean In Early Years

Most businesses fail because they run short of money. Make sure you have enough money to operate for three years and keep your operations lean until the business starts to ramp up. - Robert Zuccaro, Target QR Strategies

3. Educate Yourself About Risk And Reward

For me, risk comes from a lack of knowledge. Any area that seems “risky” is usually an area I don’t fully understand. I’d recommend listing these areas out, finding a credible source on those areas to study and making sure you fully understand them. Then I’d go back and determine what contains risk. At this point, you can also compare the risk against the reward of each area. - Jerry Fetta, Wealth DynamX

4. Maintain Accurate Financial Records

Hire an experienced bookkeeper or accountant from the very beginning, even if it’s on a consulting basis or for just a couple of hours a month. This way, your finances will be accurate from the get-go, you can project your break-even or profit analysis more accurately and you will have more confidence in making decisions that might be financially risky. - Lilit Davtyan, Phonexa Holdings, LLC

5. Find A Mentor

Is your business scalable? The majority of small businesses today are small to medium-size family businesses, which can be very successful and satisfying. While “Go big or go home’’ is a great saying, do your homework on scaling so you do not fail. The key is to find some amazing advisors and/or mentors to help you with your growth plans—otherwise, going home empty-handed could be your result. - JD Morris, Red Hook Capital

6. Be Careful When Funding Via Debt 

It’s crucial to focus on the capital structure to ensure the business is structured and financed in a sustainable manner and on a stable base to support and enable growth. This requires a clear financing strategy—one that balances equity and debt funding coupled with the correct use. It’s also essential to match funding needs to the appropriate types of debt since a mismatch can place significant pressure on the business. - Jason Hamilton, First River Capital

7. Create Both Professional And Personal Cash Flow Projections

Cash is king, and running out of cash equals the death of any business. Your cash-management strategy is actually your most important risk-management strategy. As a financial planning professional, I help my business-owner clients plan the cash flows for their business right along with their personal needs. These two are so closely linked for small businesses that they usually can’t be separated. - Todd Sixt, Strait & Sound Wealth Management LLC

8. Remember To Consider Market Risk And External Factors

Looking inward at profitability and capital management is the baseline. It’s critical to look outward too. What is the market risk and what are the scenarios that could impact your business? Have you set up credit facilities to help you through those scenarios? And remember, when it comes to credit, it’s better to ask for an umbrella when it’s not raining. - Catherine York Powers, Constant AI

9. Measure Risk Against Time, Money And Quality

Always make decisions based on the three pillars of time, money and quality. Does the financial risk you’re considering taking fall within your current project’s timeline? Does it work within your budget? Does the risk maintain the quality that your brand delivers? If you’re methodically validating your financial risk decisions, it will make forward movement easier. - Drew Gurley, Redbird Advisors

10. Be Prepared For Sudden Drops In Revenue 

Small-business owners are stretched thin in so many ways, including their time, their resources and often their cash flow. If your revenue evaporated overnight—which we saw during Covid-19 is a realistic possibility—what safety net do you have in place for yourself? Having an open line of credit for just that purpose is important because your operating costs won’t disappear if your revenue does. - Dan Henry, Green Dot

11. Always Consider The Worst-Case Scenario

When debating on taking financial risks, ask yourself a simple question: Are you okay and willing to live with this risk if it turns out to be a total loss? If the answer is no, move on. - Joe Camberato, National Business Capital

12. Keep Personal And Business Funds Separated

A top tip for a business owner looking to manage financial risk is to keep personal funds and business funds separate. Having a separate business bank account protects your personal assets from the many risks the business might incur. It also makes tax filing, insurance and capital access much simpler because auditors, insurers and lenders can clearly see the financial position of the business itself. - Luz Urrutia, Accion Opportunity Fund

13. Learn How Your Company-Specific Risk Affects Your Business’ Value

Small-business owners need to understand company-specific risk and how it affects the valuation of their business. Company-specific risk creates financial uncertainty for investors who are interested in your business. The lower your specific risk is, the more valuable your business becomes. To reduce that risk, you must deal with financial metrics in that particular paradigm. - Justin Goodbread, Heritage Investors

14. Make Sure You Get Paid

The easiest way to think about financial risk is to look at your outstanding invoices and ask yourself what would happen if your customers didn’t pay. Then ask yourself what you can do to make sure they do pay. You now have the first lesson of financial risk management: receivables management. Make sure you get paid. - Aaron Spool, Eventus Advisory Group, LLC

15. Know What Drives Your Business

Know your numbers inside and out, understand what drives your business and keep asking questions. Once you know what levers impact your business, you can better manage financial risk by focusing on the right things. - Jarred Cook, GlowTouch LLC

This article first appeared in Forbes in July 2021.