Every business that has grown into a massive entity has gone through the growing pains, the startup blues, and, yes, financial risk. Even today, there are multiple corporations that are enduring financial risks, just take a look at Tesla, Kraft Heinz, and General Electric as only a few examples of well-known companies suffering from numerous financial setbacks, from credit to liquidity to political.
While the number of entrepreneurs starting their own businesses is skyrocketing, thanks to technological innovation and their affordability, there are still many different types of financial risks that need to be managed before opening your doors – on the web or in a brick-and-mortar building.
So, what are the more common financial risks to be on the lookout for? Here are seven types of financial risk your startup should know:
1. Credit Risk
When you’re a startup, it is nearly impossible to rely on credit – and we’re not talking about borrowing from a financial institution or lender either. Credit risk is the idea that you allow a client to pay their bill weeks or months after a project has been submitted or a workload has been completed. Since you need a positive cash flow from the moment you open your doors – physical or digital – you need customers paying their obligations almost immediately.
2. Funding Risk
For many startups, particularly those in Silicon Valley, entrepreneurs will turn to venture capitalists, angel investors, and financial institutions to establish operations. It is true that startups will first prove their worth, but their company will grow into something big and important through the means of those with a lot of capital.
Many are dependable and reliable, but then there are those who will tergiversate and change their minds. This can hurt any company’s chances of succeeding, especially if they have made the necessary arrangements. You don’t want this to happen to you, but it’s a risk when you’re turning to investors.
3. Liquidity Risk
Paying your staff? Covering overhead costs? Keeping up with inventories? The answer to these questions depends on your liquidity. Indeed, liquidity risk is an important discussion that your business needs to have because without having sufficient liquid to maintain your expenses.
By being illiquid, you risk digging your company into a financial hole – and you don’t want that to happen, especially if you’re just starting out.
4. Market Risk
The market is constantly changing. There are so many factors to consider when owning and operating a business that it oftentimes requires a crystal ball, Nostradamus, and a psychotherapist to make heads or tails of the marketplace. This uncertainty is a considerable risk to any business, and it doesn’t matter how successful your company has been over the years.
McDonald’s had been a successful franchise for decades, until around the financial crisis. It suffered hard times before it endured and transformed the company into the best period of its history.
5. Operational Risk
Many private enterprises have operational risks that can threaten the integrity of your long-term survival. Everything from natural disasters that can destroy your inventory to all sorts of security infiltrations that destroyed your reputation and took all of your data, there are a whole host of factors to realize is a risk to your firm.
6. Political Risk
Yes, politics can affect all businesses in all industries. No one is immune to political risks, whether it is a new government that wants to install a new tax or a government that wants to go to war and threaten global commerce. Political risks are prevalent more than ever, and there is really nothing you can do about it, except perhaps attempt to be as apolitical as possible.
As a brand, you don’t want to alienate half of your consumer base!
7. Reputational Risk
This ties into the previous point. If you’re engaging in political activities that insult half the country, then you threaten your reputation. And, of course, it is more than that. If you’re in food service and there is a serious case of food poisoning, then who would want to patronize your restaurant? Or, if you’re selling clothing, but you’re relying on child labour, then your reputation will be viewed as exploitative.
While you can always attempt to minimize your reputational risks, there are some things that you cannot predict in society. Remember, everyone is offended by everything these days. You may not even do anything wrong, but someone will get insulted by it. That’s dangerous!
Being in business comes with a diverse array of risks. It can be a terrifying prospect, whether you are a mom and pop shop using your own funds or you’re attempting to grow your company by relying on capital from investors. There is a lot of pressure on you to survive, thrive, and succeed. Are you up for the challenge? OK, but be sure to not worry about those gray hairs on your head!