As an entrepreneur, you understand the importance of risk reduction in protecting your finances and in ensuring the proper running of your business. Much like insurance companies who do this all the time by underwriting new policies by estimating all the probable outcomes of an event based on past behavior among other factors.
And insurance companies are not the only ones who employ risk management in their businesses; restaurants do that too when they hedge the cost of the food they serve on the basic ingredients they use. You should too. You need to look for and employ the best risk management strategies to protect your business and your money. Risk management is also important for you and your family.
Here are some of the risk management tips you should start employing:
Keep the cost of your fixed payments low, relative to your cash flows
Keeping your fixed payments low, relative to your cash flows is essential for the reduction of your liquidity risk. The reason for this, as you might already know is that debt doesn’t make you bankrupt, your inability to pay the debt is what makes you bankrupt.
So, to protect your business from bankruptcy, you must have a healthy amount of working capital (net). Corporate do this and you should too. You should also employ this strategy in your personal finance. Remember that the net working capital represents all the money that’s left over after you take all your current assets and subtract the cost of the current liabilities. You can create a good working capital reserve by creating a system that allows you to make fewer payments when your cash flows dip and higher payments when you have an abundance of cash flows.
If you understand and employ this strategy, you will know why a fixed interest for a car loan is a terrible idea when the economy is against you. With this understanding, you will have to think long and hard about any additional fixed liability.
Increase cash flow by using cash to buy income-earning assets
You need to start buying things whose value increase with time, don’t be like the poor or the middle class who put their money into things that lose value with time and things that require money for maintenance.
Don’t take loans or buy a car just because you just got into some money. Instead, invest your money into things that will earn more money in the future. So, if you’re going to take a loan, make sure that you use the debt to do something that will earn enough income to pay back the debt and give you surplus income.
For example, if you’re one of the best lawyers and you or your partner loses their job, you should not be slow in changing your lifestyle to adapt to the change but you should start thinking of the possibility of that job not coming sooner, and you needed to cut costs later. And even when you’re both working, you should keep in mind that anything can happen, meaning that you should have another source of income should things fail to work out for you.
Get the right insurance coverage
Affording the best slip and fall lawyers Vancouver is an excellent thing, but don’t you think it’s better to have the right insurance coverage to protect you from expensive claims from your customers or employees? You want to avoid a situation where you have too little or no insurance. So, get a life, disability, health, and auto insurance to be safe.
You could also minimize your risk by not tapping into your retirement accounts unless it’s absolutely necessary.