Risky business: Protecting against financial risk
Your business may be small but that doesn’t mean the financial risks are. Here are five tips to help anticipate and minimise the risks that can affect micro businesses.
Risk management is one of those terms we tend to associate with big companies and people with the letters MBA after their name. Generally, people think much less about risk in smaller businesses, but micro-businesses can be exposed to significant – even unique – financial risks depending on their field of expertise and the markets they operate in. While reflecting on risk can seem alarming, it’s important to consider and mitigate risks to ensure the ongoing success of your business.
Here’s my advice for soloists looking to assess and manage financial risk:
Expect the unexpected
Risk management models (used by insurance companies to asses and manage risk) encourage you to identify and grade risks by both their likelihood and level of impact. Start by writing a list of everything that could go wrong in your business and what it would cost you. Then grade it as high, medium or low impact. Think beyond today, to tomorrow and into the future. Consider insuring against anything high impact, whether it’s very likely to happen or not.
"Start by writing a list of everything that could go wrong in your business and what it would cost you. "
Ensure you have insurance
Many soloists carry a huge financial risk every day with their health, which has the single biggest impact on their ability to succeed and earn income. Yet, significant numbers don’t have adequate insurance to cover illness, trauma or disability. We may joke about what would happen if we get hit by a bus, but most of us are not financially prepared for an accident or illness. As micro-business becomes an increasingly common business model more insurance companies offer affordable coverage to ensure you receive an income if the worst happens and you can’t work.
Advice on giving advice
If you work as an independent consultant or contractor providing professional advice in areas such as strategic planning, human resources, business technology, marketing or business process improvement (among others) you could be liable for any financial loss your client may incur by relying on your advice. It’s well worth seeking independent financial advice to see if you need to take out professional indemnity or public liability insurance to protect against this risk.
Want more articles like this? Check out the financial management section.
All systems go
Business systems can be a weak point for busy soloists who often fly by the seat of their pants during peak periods or times of growth. The lack of a systemised approach to costing and pricing jobs can create operating risks. These may include failing to recognise or itemise input costs, incorrectly estimating the amount of time a job will take or forgetting to factor in production lead times. Aim to systemise work processes and constantly fine-tune them to reduce potentially costly operating risks.
The internet is a great enabler for soloists serving as a research portal, service delivery platform, communications method and transaction tool all rolled into one. While ecommerce enables more soloists to pursue successful independent careers it also exposes them to a raft of risks. For those selling products and services online, credit card fraud is probably the biggest risk. Australian banks remain committed to refunding consumers for any financial loss due to fraudulent transactions, but generally the seller remains liable to pay for any chargeback (a reversal of the credit card payment to reimburse the consumer). Credit card scams are on the rise so it’s critical to have good security and compliance procedures in place if you are trading online.
What other tips do you have for minimising the financial risk? Is your business prepared for the unexpected?