Small businesses can take 5 steps toward minimizing their financial risk during times of crisis and beyond
Key takeaways:
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Small businesses should have a financial risk management plan in place in the event of a crisis
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Risks to plan for are categorized as internal and external
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Financial risk management planning includes:
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loss avoidance
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informed decision making
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fiscal soundness
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Strategic financial risk management plans include
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identifying and prioritizing your company’s risks
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evaluating remedies
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using effective financial tools
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measuring the effectiveness of the plan to address its shortcomings
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Small business owners should hold regular strategic planning sessions to keep their business on track and increase the chance of meeting quarterly and annual goals. A sound financial risk management plan adds another level of protection for a small business owner.
Financial risk management involves assessing uncertainties your organization may face and developing strategies to mitigate any risks. In normal times, adhering to a well-designed, updated plan could keep a company profitable. During a crisis, strategically managing financial risk could keep a small business solvent.
The financial risks a small business may face are categorized as follows:
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Internal – those that arise due to the normal operations of your company
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External – those occurring outside of the company’s control
A company’s internal financial risk can be somewhat predicted. It is related to the health of its business accounts, availability of working capital, and the debt it carries. External risk includes economic conditions, legal regulations, natural disasters, and global events such as the pandemic.
The benefits of strategic planning
One benefit of engaging in this type of detailed financial risk analysis is to minimize loss to your business because of factors beyond your control. You may not be able to predict precisely what could threaten your livelihood, but you can plan for a broad range of possibilities should something occur.
A financial risk management plan guides a small business owner in making decisions about asset allocation and cash flow. A recent study showed that the average small business has only 27 days of cash in reserve. However, experts recommend a cash reserve of three to sixth months to stay solvent and survive a crisis.
Having an effective financial risk management plan will make your company more attractive to potential lenders and investors. Knowing your ability to take on debt may open more opportunities to acquire property or other business assets. It can help you grow your business strategically and safely.
Making a strategic financial risk management plan
Financial risk management for your company requires creating a custom plan of action. The best plan for your business will be one that fits your specific company, business management style, and industry. It will include the practices, procedures, and policies your business will use to minimize its financial risk.
These steps will lead you to create a blueprint for managing your financial risk.
1. Identify your risks
Start by looking at your company’s transactions over the past year(s). A solid financial risk management plan begins by reviewing your daily financial operations, particularly cash flow.
Then focus on your debt and how much of your revenue is allocated to servicing your debt.
When assessing external risk, consider possibilities such as supply chain shortages, loss of customers, increased competition, and other cash-draining occurrences.
2. Prioritize by level of vulnerability
Once you’ve identified your financial risks, narrow your focus. There is no way to predict the future, but you can make educated guesses based on past experiences. Focus less on 100-year events and more on market conditions and past difficulties with your suppliers or customers.
Take the time to order your financial risks based on how likely they are to occur and how they will impact your business if they do.
3. Evaluate available remedies
For internal risks, look where you can minimize or eliminate the risks first.
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Debt. Check interest rates and refinance as a way to lower your debt load
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Compliance. Make sure your company is in full legal and financial compliance with all federal, state, and local authorities to avoid legal fees
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Risk-minimizing procedures. Have plans and policies to maintain equipment and provide proper security measure
4. Use the right tools
The best strategic plan is created using your own company’s data. Choose an accounting system that features robust reporting tools that can make planning easier. You can also work with experts in financial risk management or outsource this work to a chief financial officer to bring you peace of mind.
5. Measure and make adjustments
Just as you use key performance indicators (KPIs) to track your company’s progress, you should also routinely check your financial risk management plan’s efficacy.
You will need to monitor and review your internal risks and determine if anything needs to change. You will need to decide if your priorities have shifted or if your business has increased exposure in any areas.
If you need expert advice
With something this important, it makes sense to ask for assistance.
The team at Franco Blueprint specializes in small business concerns. Trust our experts with your financial risk management planning and all your accounting needs, from automating to outsourcing. We can assess your financial status and make recommendations to minimize your risk.
It is our business to assist small business owners and help them secure their livelihoods during times of crisis and beyond. Contact us for a free consultation.