Some CEOs and business owners go through years of making mistakes before they master the art of lowering financial risk. Knowing some of the common mistakes many successful entrepreneurs have made will help you make wiser business decisions. Use these five financial risks as a basic outline to keep you on track to reducing your overall business risk:
1. Never under-price your solutions.
Some people have a tendency to price their products or services low during the beginning days of their businesses. The idea is that low prices will set them apart in their market. However, as operating costs increase, so will the need to increase prices. When this happens, your loyal customers may be offended, feeling that price increases are unfair. The wiser route would be to come up with a more effective way to differentiate your solutions from your competitors’. That way, you’re able to justify your increasing prices. It’s impossible to make a profit if your solutions are priced too low. To avoid this financial risk, do some extensive market research. Then, price your solutions near or just above the market average.
2. Don’t hire until you have the funds to afford it.
Another common financial risk is hiring employees based on contracts and promises. In the business-world, there are times when contracts become promises of future revenue. Yet, contracts are not equivalent to actual money in the bank. When it’s time to pay your employees, you’ll need to have the funds in your account to cover the payroll costs. So, resist the urge to hire more employees than you can afford before your promises are actually converted into money.
3. Never borrow money you don’t need.
Qualifying for a business loan can feel like a great accomplishment. But, just because a lender approves you doesn’t mean you need to take on the debt. Banks make money by collecting interest on various types of loans, including business loans. The best way to lower this financial risk is to pay little to no interest at all. Therefore, if you don’t truly need a loan, don’t sign for one. And, if you do find yourself in need of funds, borrow only what you need to help your business grow. Paying interest increases your financial risk, decreasing your overall ROI.
4. Don’t depend on just one revenue source.
Think of your business revenue like you would your stock portfolio. When it comes to the investments in your portfolio, the majority of your company’s revenue needs to come from more than one source. Oftentimes, as a startup, you spend most of your time serving your early customers. This makes it hard to venture into other markets and build new accounts. Those early streams of revenue tend to die off over time. So, avoid this financial risk by concentrating on building other revenue sources as well.
5. Don’t fill too many overhead positions.
Every person within your company who receives paid compensation should have a justifiable position. Some of these types of positions include those who serve customers, develop products and convert leads into sales. Hiring “overhead” people can be a serious financial risk, especially if they don’t produce anything or make the company money. This will effectively decrease your company’s overall ROI.
Not all financial risks will have a negative impact on your business. Yet, there are those that could mean the difference between building a successful company and closing up shop early in the game. Reduce your company’s overall business risk by avoiding these five mistakes and financial risks from the very beginning.