Article: Reducing Risk In Your Business

on February 23, 2016

If you want to start a business, you simply have to be risk-tolerant. As a wise man once said, “An entrepreneur is a person willing to take a risk with money to make money.” Risk is in the job description.

Part of that risk is personal – you are risking your reputation on this new business. Part of the risk is financial – in all likelihood you put your own skin in the game to launch this venture. And part of the risk is legal – if things don’t work out, you could be on the hook personally.

But, that said, there are ways to reduce the risk inherent in the game of business, and that’s smart. The best entrepreneurs look to minimize the risk whenever possible.

How?

For starters, be prudent with your capital. Keep your overhead low, both at the start and down the road. Financially, probably your biggest risk is the business cycle, whereby the economy generally and your business specifically, will have ups and downs, good cycles and bad.

The best way to reduce that sort of risk is through diversification. By selling a diverse portfolio of goods and services, you ensure that you will be bringing in money, no matter the broader economic situation. By the same token, you also want to strive to diversify your client base, so that you are not overly-dependent on one or a few clients or customers. Having all of your financial eggs in one basket as it were is never wise.

It is wise to also learn about and invest in passive income streams. That is, your business needs to have ways to make money that are not dependent upon you specifically doing something; it needs to have the ability to make money while you sleep. For example, an e-commerce website could be a fine passive income source, as could a rental income property.

Legally, to the extent possible, try to avoid lawsuits – as both a plaintiff and a defendant. Yes, there are times when you have to sue, or are sued. But by and large, as a general rule, remember that litigation is expensive and time-consuming and often results from broken communication. So, given that business really is a lot about relationships, the risk-reducing move is to communicate well and foster positive relationships. That alone will reduce the potential for litigation.

Risk can additionally be managed by being smart in other legal ways:

  • Incorporate: Creating an LLC or an S or C corporation creates a firewall between you and the business. Business debts will not be considered your own personal debts. LegalZoom can help you with this.
  • Put it in writing: Whatever “it” is, it needs to be in writing. Why? People’s memories fade over time, and people don’t always tell the truth. Your writing is your proof.
  • Get properly insured: The point of insurance is to reduce risk. You reduce your risk by not only getting enough insurance, but the right kind. This is where our friends at Allstate come in.
  • Lawyer up: You will not regret having a good lawyer on your team. A sharp attorney cannot only steer you away from trouble, he or she can also protect your physical assets, intellectual property, and so on.

The bottom line is this: When you think about great entrepreneurs, it seems like they are big risk-takers. But great entrepreneurs also know this: There is a difference between a wild risk and a smart one, and the savvy entrepreneur always looks to bend the odds in their favor by reducing risk to the extent possible.