10 Ways to Reduce Business Start-up Risk
Many people think that business is a gamble, such that they proceed based only on their gut feel and just let destiny decide the fate of their investment. However, unlike in gambling, while there is risk in business, not only is there a chance of ultimately succeeding, there are also many ways to reduce risk.
Here are some ways to improve y our chances at success in business:
Have a business plan. Most people starting a business are very optimistic about their prospects so they wish to get started as soon as possible. Usually, they are blind to the potential problems. Having a business plan will let you see potential bottlenecks and other issues. Incorporate sensitivity analysis to your planning. Sensitivity analysis shows what changes would result if a variable like actual sales differs from your projections. If it shows that the business would not survive if there is just a moderate decrease in sales, then you should think twice before proceeding with the venture.
Start small. Starting out small will enable you to improve your systems without losing too much money.
Keep non-reversible expenses at a minimum. At the beginning, you must be careful in taking on expenses that are hard to reduce in case your sales projections fall short of plan. Some of these are leasing too large a site, buying equipment that is too expensive, and taking on excessive loans. These will rapidly deplete your working capital.
Limit your exposure by being a corporation. Although initially a corporation is more expensive to set up than a sole proprietorship, its limited liability is well worth the price. In a corporation form of organization, you will be personally liable only up to the extent of your subscribed capital. If your subscription is already fully paid, then your personal assets can no longer be pursued by a creditor.
Do not be dependent on a single buyer. Unless you plan on recovering your capital in a very short time, it is too risky to base your survival on one company if there is possibility that they may get another supplier in the future.
Have reserve cash. Despite all the planning you do, there will always be unexpected issues that will need a lot of cash to handle. The amount you set aside should be substantial; in some ventures, you may need almost as much as your initial capital.
Have a reliable internal control system. Studies have shown that more cash has been lost because of internal theft today than from armed robbery. This is because external theft seldom occurs while internal theft usually goes unnoticed for a long period. The best time to set up an internal control system is at the start, where there would be least resistance from employees.
Get enough insurance. Obtaining fire insurance is the only insurance that most companies get, but there are other types of insurance that may prove critical to your company’s survival. One of the best types of insurance to get is the business interruption insurance, which covers lost sales and profits that your business will incur if you cannot operate for a while.
Have off-site back-ups or copies of critical information or documents. Even if the chance of a fire destroying your office is remote, the possibility still exists, and considering that the cost of having back-ups or copies are quite small, there is no justifiable reason why you should not have them. You should also keep your fire insurance policy off-site.
Learn about bookkeeping and taxation. Too many entrepreneurs leave bookkeeping and taxation to their accountants. Unfortunately, you stand to lose the most in case of an error in this area. Many businesses have suffered heavy penalties or were closed due to violation of tax laws. While you do not have to do the accounting by yourself or know all the details, having a basic knowledge should allow you to spot obvious problems. Always check first before signing anything. Also, many bookkeepers and accountants become more careful if they know that their client is scrutinizing their work.
*Originally published by the Manila Bulletin. D-4, Sunday, June 2, 2013. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.