The Entrepreneur’s (Brief) Guide to Risky Business: Managing Finance in a Volatile World
- April 25, 2023
The volatile economic situation in the UK is by no means news anymore. New entrepreneurs are well aware of the risky market into which they are entering, but this is not stemming the tide of new start-ups and innovative industries. However, economic risk is not the only kind of risk; as an entrepreneur, what should you understand about financial risk in a new business?
Identifying Financial Risk
There are various forms of financial risk that a business will encounter over time. Market risk refers to the potential for market shifts and changes in the industry, which we will discuss later. Credit risk is the risk of offering services before payment to clients, and operational risk is the potential for internal failures of staff or management. Financial risks originate from numerous different sources, but there is one essential element that is threatened by each of these risks: cash flow.
Cashflow is a simple equation that reconciles the money you receive with the money you spend each month. It does not reflect your business’ profits, but rather the literal flow of cash in and out. Negative cash flow means you are spending more than you are earning and can be a harbinger of significant difficulty – even if the spent money is heading to investment.
With cash flow having been identified as an instrumental aspect of short- and medium-term business security, it becomes a priority for you to manage your business’ cash flow effectively. But how exactly can this be done?
In many cases, an independent set of expert eyes can be useful in identifying specific risks within your existing model, where you might not otherwise be able to see the wood for the trees. Tangible solutions they might recommend can be roughly split between two distinct fields – internal, and external. Internally speaking, over-investment in expansion or assets can deplete holdings, and leave you vulnerable to an economic shock.
The Power of Diversification
The key long-term approach to minimizing risk here is that of diversification – or how not to place all of your eggs in one basket. With direct regard to your business’s finances, this means ensuring your investments are diversified. Investing – whether in stocks or assets – yields the most growth potential for existing capital.
But invested capital is naturally at risk from market movements and value shifts. The solution is to spread the risk across multiple areas, to invest wisely in order that any one business or market failure does not tank the entirety of your holdings.
Addressing Market Risk
On the other side of the coin, there is the way in which your business interacts with the market itself – the market risk we alluded to earlier. In essence, this is the services or products you offer, in terms of their range and their place within your wider industry. Many businesses are acutely successful on account of providing one thing, and providing it extremely well – but there is an inherent risk to this model, from which you can learn and adapt.
Change is always in the air, and businesses always need to grow and re-adjust in response to these changes. For example, considerable advancements in the field of AI translation and content generation have already had demonstrable impacts on the viability of translation services and content mills; meanwhile, straightforward administrative applications and services are losing ground to ‘smart services’.
Failure to adapt here, just as with failure to directly diversify your investments, can spell downturns in revenue. Investment in new technologies and frameworks can be necessary in order to thrive – illustrating well the push-pull of competitive success in the industry today.