How Founders Reduce The Financial Risks Of Running A Business
Running a business is a risk. It always demands, on some level, some degree of investment, whether it’s the money required to start it up, your time, or your reputation at stake. However, it doesn’t have to be the life and death of your financial future. Smart founders take the time to make sure that they’re able to protect their own personal prosperity as they’re building their business. Here, we’re going to take a look at some of the steps you can take to do the same.
Get Some Help With The Funding
First and foremost, you might want to make sure that you’re not the only one with their money at stake in the business. Seeking funding for your business, whether it be through a business loan, finding an angel investor, or encouraging someone within your network to put their faith in you, isn’t just a means to share the financial load of getting the business up and running. It’s also one of the first stress tests of your idea and its potential success. If you’re able to produce a business plan that outlines your path to success and convince investors or banks to provide the funding that you need, it’s a good sign for the business itself.
Make It A Limited Company
The structure of the business you own can play a huge role in how much personal financial risk you have attached to it. Rather than running it as a sole trader or partnership may be easier to set up, but it also means that you have more direct liability, which can include financial responsibility for it. By setting up a limited company or limited liability partnership, your only personal liability is the amount of money that you invested in the business, yourself. Your personal assets are protected if the business fails, or even if it is targeted by legal action (unless you can be found personally liable for misconduct or fraud within the business). It also gives the business a more formal identity, which may help when working with lenders, suppliers, or larger clients.
Separate Business And Personal Finances
Whatever type of structure you decide to work with to build your business, you should make sure to avoid keeping your personal and business funds in the same place. For limited companies, it might be a legal requirement that you keep accounts and records separate. However, even when it’s not, it’s still best practice, helping you avoid mistakes such as accidentally spending business money on personal purchases, or vice versa. It’s best to open up a business account and then use it to pay yourself a salary. If your business is profitable, you can still decide to pay yourself a bonus as a reward for your hard work at any time, but you can make it a lot easier to ensure you always have enough money in the account to support your business, so long as it’s making enough revenue.
Diversify Your Own Wealth
Just as your personal finances should not be tied directly to the potential failure of the business, your potential wealth should not rely on your business alone. When you’re able to start benefiting from the profits generated by your business, then, besides investing them back into the business, you can look into building your own portfolio of investment assets, as well. By working with an investment broker, you can find opportunities such as stocks, bonds, and funds that can help you grow your wealth independently, or you can even invest in real estate, provided that you’re able to manage it effectively. By diversifying your wealth, you still have a much greater chance of financial freedom than being tied too closely to your business’s successes or failures.
Keep A Strong Cash Reserve
How you run the finances of the business can help ensure that its financial problems never become your problems, even if you haven’t set it up as a limited company. First, you should keep a cash reserve as best as possible, ensuring that you have a pool of cash to rely on if you start to struggle due to late payments from clients, rising overheads, or slowing sales. While you should aim to address these cashflow concerns as quickly as possible, such as with the use of invoicing software or by cutting and managing costs as best as possible, a cash reserve can make sure that temporary hiccups don’t become long-standing problems.
Diversify Revenue Streams, As Well
Just as your personal wealth might benefit from the safety offered by a diverse range of investments, your business benefits from a more diverse range of revenue streams, too. Or at least, it can, if managed smartly. Depending on one client, one product, or one sales channel can create serious financial risk. If that customer leaves, a supplier changes terms, or demand drops, the business may suddenly lose a major part of its income. Founders can reduce this risk by building multiple revenue streams, such as selling to different customer groups, offering subscription services on top of individual sales, or developing complementary services. You have to make sure, however, that these new revenue streams are scalable with the rest of the business and don’t require a major time or financial investment that they’re unable to justify.
Stay On Top Of Your Taxes
Many founders, especially those relatively new to the game, can find themselves falling behind in their taxes when they treat it as an afterthought, causing them to scramble when it comes time to pay. Setting aside money for VAT, corporation tax, PAYE, or self-assessment helps avoid panic when deadlines arrive. If you’re unable to handle it alone, then you should consider hiring an accountant to help you out.
There’s no way to completely erase the risk inherent to running a business, but that doesn’t mean that there’s no way to mitigate it. With the steps above, you can ensure that you’re able to secure your future, giving you the freedom to run your business in a way that matches your ambitions and goals.