By Bert Seither, Vice President at 1-800Accountant
About the author: Bert Seither is the Vice President at 1-800Accountant, the nation’s leading accounting and consulting firm for small business owners and entrepreneurs. For over 10 years, Seither has assisted thousands of small business owners to help put their companies on a path to prosperity.
Just like skydiving or hunting deep in the woods, starting a small business comes with a significant amount of risk. The good news is that there are strategies you can utilize to reduce this risk and ensure you have the best chance of being a successful entrepreneur with your venture. Below are 5 tips on reducing risk as a small business owner.
1. Maintain your income sources for now, such as a day job.
Always keep in the back of your mind that launching a brand new venture and making it profitable both take lots of time, effort, and even a few sleepless nights. This is why it is critical to keep any sources of income you currently have flowing into your personal bank account. These income sources may be a day job, a part-time gig, or even passive income you are earning from rental property you own. Before diving into a small business headfirst, you must be completely confident in your decision to minimize as much risk as possible. If things unfortunately do not work out with your business entity, you will at the very least have some income coming in from your other work. But if things work out very well for you, it’s possible that you’ll be able to give up your day job sooner than later to focus all of your attention on the business.
2. Be sure you have enough money in the bank.
In order to cut down on the financial risks of starting a business, it is imperative for you to be standing on solid financial ground prior to making this life-changing decision of business ownership. More specifically, develop a reasonable financial plan and budget for your new venture. This means spelling out specific dollar amounts in terms of startup costs, ongoing expenses, profit projections, and income you currently have coming in. It’s wise to project your business profits 6 months out, a year out, 3 years out, and even as far ahead as 5 years into the future. This can be very tough, but make reasonable estimations so that you don’t wind up making much less money than what you thought you would – and not having enough in the bank at a critical time in your life.
3. Adopt a formal legal entity structure for your company.
If you register a formal legal business entity for your venture like an LLC, S corporation, or C corporation, you can immediately reduce some of the risk involved in your entrepreneurial endeavor. Limited liability protection is a tremendous advantage of owning a formal entity. For example, you can clearly separate your personal assets and those of your business by doing this, and your personal assets will not be at risk if something happens to your business. This helps protect your home, your vehicles, and your personal finances from being at risk to creditors or lawsuits against your enterprise. If your firm operates as a sole proprietorship or partnership, you likely will face increased risks. Additionally, establishing a formal entity can help give you more credibility as a small business owner and, therefore, should increase your chances of long-term profitability.
4. Surround yourself with smarter and more experienced individuals.
There are so many little things involved in running a business that no individual can do it all – or even know how to do it all. With that said, make every effort to surround yourself with others who can help you be successful. There are countless products, services, and professionals at your disposal that are all intended to help small businesses and startups with every task under the sun. From web designers to cloud solutions to business consultants to accountants, there is something for everyone, regardless of your industry and financial capability. Remember that when you surround yourself with others you can trust to help you, the risk involved in your business will drop significantly. Not only that, but also these support members will help guide you toward a brighter future.
5. Put down a formal business plan on paper.
Writing up a solid and attainable business plan is yet another way to reduce risk. A formal business plan should include details about business goals, an overview of your potential market and customer base, estimated prices for your products/services, a list of one-time and ongoing expenses, profit projections, and other relevant information. Your business plan should serve as a roadmap of your future as a small business owner. In turn, it should help you navigate around hurdles by reducing risk along the way.