Taking risks is a normal part of a small business owner’s life, but taking too many financial risks can definitely be detrimental. In order to reduce cash flow risk in a small business, the owner and the management team need to stay focused on developing new products, developing new selling strategies and making sure the strategies they created lead to profit. Besides this general approach, there are also other ways small businesses can reduce their cash flow risk. Here’s a list of 7 ways to mitigate cash flow risk in a small business:
- Create A Business Plan
Having a good business plan is a must for all small businesses. The financial part of the business plan should be the guideline that will be checked before making any financial decision that can affect the business.
- Conduct Market Research
In order to determine the best selling strategies and the market trends, research should be conducted by all small business owners. Determining the target audience’s characteristics reduce the cash flow risk. Knowing your target guarantees you’ll make sales and that is also a guarantee for profit and mitigating cash flow risk.
- Debt Control
A credit system should be put in place early on, in order to avoid long-term problems. Relying heavily on debt increases the risk of having financial problems and leaves the business vulnerable. A fixed rate debt is definitely preferred to a flexible rate debt where the risk of interest rate hikes is sometimes too much for a small business.
If you cannot choose a credit with a fixed rate debt, make sure you pay all your debts in time to avoid penalties and legal problems.
- Cash Flow Analysis And Cash Flow Forecast
After conducting a thoroughly cash flow analysis, create a cash-flow forecast. Being organized and knowing who you have to pay and when will mitigate the cash flow risk. A forecast also provides monthly coasts and it will help a small business owner to know the financial situation of the business in real time.
Small business owners usually think insurance is a luxury expense they cannot afford, but without it a natural disaster can mean the end of a business. Temporary losses are better than permanent losses so making sure the insurance expenses are included in a small business’ budget is definitely a must.
The best way to mitigate cash flow risk in a small business is to plan ahead. Make a list of all potential risks your business can face and create recovery plans. Preventions is the best way to avoid problems and having a risk management plan in place will absolutely reduce cash flow problems.
Another well-known way to mitigate cash flow risk is to diversify the portfolio of the business. Having more than one source of money is the best way to guarantee the business will find its place on the market no matter what happens to the initial product. Before expending the business’ portfolio market research should be conducted to see if the new product will be well received by existing and potential customers.