Entrepreneurs are no strangers to risk. They understand that to achieve rewards, one must take on risks. But the famous saying, the greater the risk, the greater the reward is not necessarily true.
Big companies have achieved even greater rewards by managing their risks.
The very first step in managing risks, is to be aware of them and this article seeks to identify 5 risks that every entrepreneur has to face.
1. Liquidity Risk
Liquidity risk is the danger of not having enough cash on hand to meet expenses and obligations as they fall due.
Banks do offer overdraft facilities to those in need of cash, however this is expensive and not always available.
Liquidity risk can be mitigated by budgeting and forecasting future cash flows and by ensuring that the timing of incomes precedes expenses. Failing to mitigate this risk, could bring your business to a sudden halt.
2. Counterparty Risk
Counterparty risk is the danger that another person or company fails to deliver an essential good or service to you on time. This can prevent your business from carrying on its activities.
A good way to minimise this risk is to do background checks and seek testimonials from your supplier’s other customers.
Always ask yourself, what key areas of my business are dependent on other people, and are they reliable?
3. Reputational Risk
Other businesses and individuals are also worried about the counterparty risk you bring to their deals. They are doing background checks on you and so you need to be sure that you have a positive presence on social media.
This is reputational risk and making sure every customer is satisfied can reduce it.
A bad reputation can spread quickly over the Internet and who knows how many potential deals it can thwart.
If you have time, go back to old customer issues and see if you can sort them out now.
4. Operational Risk
Mistakes happen in business and so it is important to communicate problems with clients so that a bad reputation isn’t developed.
A better way than managing the outcome of a mistake is to prevent it in the first place.
Operational risk is the danger that your business doesn’t have a safety net when it makes mistakes.
We recommend: Protecting Your Business against Risk
It can be caused by rogue employees, poor IT systems, inefficient policies and bad processes in an organisation.
It difficult to measure this risk and so the best way to mitigate it is with an outstanding management team.
5. External Risks
You could be the best entrepreneur in the world with the greatest idea, but it could all end tomorrow due to external risks. These risks are beyond your control.
Currency volatility, natural disasters, economic recessions, shortages of raw materials, the list goes on.
The best way to deal with these risks is to use insurance and other financial instruments. It can get complicated, but it is worth paying attention to.
We recommend: Government Funding and Grants for Small Businesses
At the end of the day, risk is something we have to live with. Risk can also provide opportunities and entrepreneurs know how to gain from them. And with proper risk management, businessmen can enjoy all the upsides of risk and less of the potential downsides.