The 6 Most Common Business Ownership Risks
When you decide to become a business owner, you face numerous risks. Some of these perils will be unique to you and you alone. Others will be universal, such as natural disasters, rising supply costs, and runaway inflation.
Business risks can even vary wildly from year to year. For example, the pandemic's unprecedented effect on businesses worldwide eclipsed most other threats in the past year or two. This has had a catastrophic impact on the bottom lines of countless companies.
Financial risks and business ownership go hand in hand. However, being aware of the most significant risks you may encounter on your entrepreneurial journey will help you avoid them altogether or minimize the impact.
One thing is sure: the inability to recognize and address critical business risks can lead to catastrophic business failure. That’s why the best entrepreneurs make risk management something they think about every day. Consider incorporating it into your own management strategies.
Here are the 6 most common business ownership risks.
Not Enough Money to Cover Business Expenses
Not having enough cash to cover expenses is one of the biggest reasons businesses fail. Keep in mind that even if your company seems successful, you could still suffer from a cash crunch.
Here are some of the reasons that might happen:
Failure to collect money owed to you
Expenses too high relative to sales volume
Sales or prices are too low
Let's say you've been in business a while. In that case, one way to alleviate your cash flow problems is to renegotiate with your suppliers and vendors.
These contracts might have been established when you were just getting your business off the ground. At this stage in a company's life, many entrepreneurs blindly accept terms without negotiating to get started as soon as possible. This leaves them paying too much to acquire inventory.
Dust off these early contracts and look over them with a proverbial fine-tooth comb. Call each vendor so you can discuss new terms. You might even find you're eligible for a discount because you've been a reliable business partner for so many years.
Another reason for a cash crunch may be that you give your customers too much time to pay their bills. Either tighten up your timeframe or consider offering a discount for paying early.
You could also use invoice factoring. This is where you hand over your enterprise's outstanding invoices to a third party as a way to boost your cash flow.
A factoring company will immediately pay you most of the invoiced amount, then collect payment directly from your customers. Use this method carefully to avoid damaging customer relationships.
One of the most challenging things for businesses to do these days is hire the right team members.
Without top-tier talent to fuel business growth, a company is a significant economic risk. An enterprise is only as good as its talent.
The right caliber of employees can mean the difference between success and failure. Many enterprises found it challenging to recruit skilled workers even before the pandemic began. COVID-19 has only compounded the problem.
How Small Companies Can Compete
Lots of businesses find it incredibly challenging to compete with large companies for top-tier talent. Bigger organizations can usually offer better benefit packages, salaries, and other advantages.
Smaller enterprises should focus on highlighting their unique strengths. Forming robust candidate relationships, offering a vibrant company culture, and providing the opportunity to make a substantial personal impact are a few things that small businesses can usually do better than large companies.
Employee Referral Programs
There's nothing more exasperating than advertising for a new team member and getting dozens of unqualified candidates. This is a colossal time-waster, particularly for business owners who can’t afford recruiters.
One possible solution to this dilemma is offering monetary rewards for employee referrals. Most of your employees will probably recommend someone to you only if they’re a suitable match. This means they’re pre-qualifying candidates, doing your recruiting work for you.
Referred candidates often have a better picture of what it’s like to work at your enterprise than the candidates you’ll pull in through ads and job listings. This makes them more likely to be a good fit.
Disruption by a competitor is an exceedingly common risk faced by many businesses.
If your pricing model is inferior to what your rivals offer, you could be in danger of losing customers.
Perhaps your competitor found a way to boost manufacturing efficiency in a way no one ever thought of before. Or maybe they adopted an aggressive pricing strategy because they’re hungering for a rate war. In any event, you’ll need to address this problem ASAP.
Another way your competitors can disrupt you is through innovation that makes your business model irrelevant. It’s important to have your finger on the pulse of trends in your industry so you can foresee this happening before it makes your company obsolete.
Disruptive innovation can take many forms, such as a groundbreaking new business model, a cutting-edge technology, or an entirely new spin on an established product. This type of innovation has the potential to displace established enterprises, changing the way business is done in entire industries.
At a simpler time, entrepreneurs were a little more proficient at figuring out what disruptive innovation in their industry might look like. This helped them formulate actionable strategies to mitigate these risks. Organizations had time to react to disruptions in this less complicated business environment because of how long it took to gain market traction.
These days, the pace of disruptive innovation has accelerated because of technological advances like cloud computing, instant information sharing, and cutting-edge business platforms that streamline sales processes.
This has increased the number of “overnight successes” in the business universe. Many of these paradigm-shattering companies don’t follow a traditional path to market adoption, making them harder to track.
As a small business owner, one poor decision can be the death knell for your entire company. You need people in your corner who can give you expert advice. If your company is large, you might have an army of advisors you can rely on for guidance.
If you’re a solopreneur, you might be tempted to make tough choices on your own. However, even if you’re the only employee of your company, you should have at least one individual you can count on to act as a sounding board. That way, you're not living in a dangerous bubble of misinformation.
This is an individual you can bounce ideas off before making final decisions. You can always count on them to give you honest and relevant advice based on their considerable experience.
These days, business information flows at breakneck speed. Because of social media, news that took days or weeks to reach the four corners of the earth now spreads in mere minutes. Once that knowledge is unleashed, people make decisions faster than ever before.
This tendency to quickly make decisions based on this rapid flow of data often leads to some bad calls.
A few bad decisions can destroy a tiny enterprise, while multinational conglomerates are more resilient. Larger enterprises have more checks and balances and deeper pockets than smaller businesses do.
Keep in mind that you can't make good decisions without knowing all the facts.
Instead of subsisting on a constant diet of social media misinformation, get your facts from solid industry sources.
This means reading the business section of one or two daily newspapers, attending industry conferences, and reading trade journals.
Business losses incurred during a natural disaster such as a tornado, flood, or earthquake are covered by insurance. However, they still have the power to disrupt your business.
According to the Federal Emergency Management Agency (FEMA), over 40% of businesses never reopen following a natural disaster. Even if your property isn't damaged, your enterprise might suffer a devastating loss if customers cannot do business with you.
The better you plan for an unforeseen event, the better off you’ll be. That’s why you need a business continuity plan (BCP). Consider looking at all potential threats and devise a BCP to ensure your business can continue after a catastrophe occurs.
A BCP creates a backup that mimics your company’s essential processes. You’ll also need a communication plan in place to reassure stakeholders, customers, and employees that operations will continue despite the loss.
When you operate an enterprise, you always need to be aware of your personal liability.
No matter what type of business you run, things won’t always go as planned. Because we live in a lawsuit-happy society, it's an excellent idea to take a good look at the legal risks you might face when starting a company.
A delivery driver could slip on your steps while delivering a package to your business. Or a customer who’s dissatisfied with the quality of services you provide might decide to take you to court.
It’s scenarios like these you need to be prepared for. This will save you headaches, financial difficulties, and business interruptions down the road.
Protect Yourself with the Right Legal Entity
Let's say you're running your business as a sole proprietorship or general partnership. In that case, you're personally liable for whatever happens in your company, because there’s zero separation between you as a company and you as an individual.
If your business is sued, it’s just like you got sued, and your personal assets could be seized in a settlement.
Even if you don’t have considerable personal assets now, you still need to think about separating your business from your personal life. Creditor judgments can last up to 22 years. Even if you have minimal cash reserves today, that might not be true in a decade or two.
However, separating your business assets from your personal life is a little more involved than merely opening a business bank account. Think about creating a formal business structure for your enterprise that shields you from personal liability.
Forming a limited liability company (LLC) or a corporation will accomplish this. Once your business is organized as an LLC, it exists as its own business entity. The company is now responsible for 100% of its debts and liabilities, and you’re off the hook.
How Franchise Ownership Mitigates Risk
If you’re a budding entrepreneur, you have a couple of ways you can break into the business world. For example, starting a business from scratch or investing in a franchise.
By owning a franchise, your risk of business failure is significantly lower than if you went into business on your own.
Built-In Brand Recognition
Franchises like Subway and Taco Bell come with built-in brand recognition. In difficult times (like the current pandemic), customers turn to the national brands they trust.
That means customers already know these brand names, so there’s a pre-made fan base for what these franchises offer. Franchise companies spend millions of dollars on marketing their brands to customers. That's something you can take advantage of even before opening your doors!
Access to Top-Notch Training
As a franchise owner, you’ll enjoy intensive, hands-on training programs. That way, you’ll know exactly how to run a business so you can accomplish your entrepreneurial dreams.
For example, McDonald’s offers the following as part of its training program:
12-18 months restaurant training
Self-directed, part-time training for 20 hours per week
Seminars, conferences, and one-on-one training sessions
Success based on competency
Operator training classes conducted by local professionals
You Know What to Expect
Reading the Franchise Disclosure Document (FDD) provides you with an excellent idea of what it’s like to be a franchise owner before investing in a business. That way, there are no unpleasant surprises.
After reading the FDD, you’ll have a better idea of the expenses you’ll be incurring, what your responsibilities are, and how successful the average franchisee is.
The FDD provides you with the names and contact information of current and former franchisees. You can check out the franchisor's claims by speaking directly to these individuals.
Proven Business Model
Franchisors spend years perfecting their business models, and they have a proven track record of success.
You'll get this winning system and a proven methodology that helps ensure your success when you buy a franchise.
Cuts Down on Mistakes
There are all kinds of mistakes you can make when you're embarking on your entrepreneurial journey. This includes choosing the wrong location, not having a good product-market fit, an inability to understand business cycles, and overstaffing the business.
When you invest in a franchise, you’ll be the beneficiary of the franchisor’s expertise they’ve accumulated over the years. They’ve made all the mistakes so you don’t have to!
Robust Support Network
By attending the franchisor’s conventions and other national, regional, or local meetings, you’ll be building a robust network of support.
You’ll be able to talk to experienced franchisees who can answer all your questions based on their experience in the exact same business you’ve just purchased. These individuals can act as mentors, helping you avoid pitfalls along the way.
Blaze a Path to Business Ownership
Franchise123 is your gateway to the wonderful world of franchising. Break the corporate chains that bind you to a dreary dead-end job by signing up today!