It is fun to start a business, but it’s also risky.

Successful entrepreneurs are masters of minimizing risk. Entrepreneurs face risk regarding creating new products, manufacturing them, marketing and selling, offering services, and earning a profit. There are several ways you can minimize risk in your startup.

Create a disaster recovery plan.

Identify the key components of your business and analyze what it would take to recover it in case of a disaster. For example, one day you get a phone call and a customer tells you that your website is offline. Your next step is to call your hosting company and you realize that they are out of business. Your website is gone, your hosting company is out of business. If you haven’t prepared, you are going to scramble, but if you have done the necessary preparation, you have a recent backup of your website. All you need to do is to find another web hosting company and upload your website.

It is super important to come up with a list of mission critical aspects of your business. Identify each area and ask yourself. “If I lose this part of my business, in what ways will it hurt our revenue, reputation, etc?” The other question you should ask is “How long will it take our company to restore this part of our business in case of a disaster?”

Watch your cash.

Improper cash-flow management will turn the exciting experience of starting your business into a nightmare. Never guess about how much money you have on hand. At the very least calculate your cash-flow monthly, and monitor it constantly. Also, know how long your cash will last if your income stream comes to a halt. Understand your total accounts payable and the number of days accounts are outstanding.

Create a contingency plan. Set aside a cash reserve to keep your business running for at least six months if you take a revenue hit.

Also, have a list of “expenses to cut first” in case of emergency. You don’t want to be scrambling when you are short on cash. Be ready. Expect the worst.

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Understand specific risks to your business.

As your business is unique, so are the risks involved. If you own a restaurant you will have very different risks to worry about than if you owned a law firm. As an entrepreneur, you must understand the risks inherent in your own business.

It makes sense to talk to several insurance professionals. Also, meet with a business attorney who specializes in working with businesses similar to yours. It would also help you to talk with several entrepreneurs who run businesses similar to yours. Ask them about the various risks they see in their own businesses. Those who have been in business for a while will give you valuable insight.

When you speak with other entrepreneurs ask them questions like:

  • What kinds of insurance coverage do you have for your business?
  • Have you had any litigation against your business?
  • Are there any risks involved with your business I should know about?

You might think that entrepreneurs would be protective about sharing the above information with you, but in reality, most of them will have no problem helping you out.

Avoid long-term contracts.

Long-term contracts seem appealing because you are guaranteed a certain rate, but they are also dangerous. Many businesses sign long-term property leases. The problem with those is that they are nearly impossible to get out of. If your business takes a loss in revenue, and you no longer need so much space, you could be paying for years for something you no longer need. If you have to sign a contract insist on short-term agreements or an easy out.

Form the appropriate business entity.

The best way to protect your personal assets from potential lawsuits is to form the appropriate business entity.

There are three common business entities:

  • Sole propriety – It is the easiest and least expensive to set up, but it offers the least amount of protection.
  • Corporation – Offers much greater protection than a sole proprietorship. If you plan on raising money, a corporation is a better option than an LLC. Creditors cannot collect a shareholder’s personal assets but can collect the shareholder’s dividends.
  • Limited Liability Company (LLC) – Offers much greater protection than a sole proprietorship. In some states, a creditor cannot collect the members’ LLC distributions.

Always consult an attorney on business entity matters.

Avoid giving personal guarantees.

If you are fairly new in business and you need a loan, most likely you will have to give some kind of a personal guarantee. If there are multiple owners in your business, it helps if you spread the personal guarantee. For example, if there are three owners in your business, try to negotiate that each owner is only responsible for a third of the loan amount not the 100% of the loan. Avoid your spouse signing the personal guarantee, to protect assets that are not owned jointly.

Reduce the timeframe of the guarantee. Negotiate to remove the personal guarantee after three years even though it will take you five years to repay the loan. Another option is to limit the amount you guarantee. If you are borrowing $600,000, you can ask to have your personal guarantee cover 50% of the loan or up to $300,000.

Set realistic goals.

It feels great to have huge goals, but in reality, they won’t help you. Realistic goals are much more likely to materialize. As you develop your business strategy, make sure you go forward one step at a time and that your goals are as realistic as possible. Instead of thinking what will happen 5 or 10 years from now, think 6-months to a year in advance.

If you are just starting out with zero customers, try to get your first 10 customers, then 50, then 100, and so on. If you set an unrealistic goal, you will get discouraged and frustrated. Unrealistic goals will seem unobtainable and it will hurt team morale.

Price your product right.

Pricing is just as much an art as a science. The wrong price can hurt your sales short-term and it will put you out of business. For many startups, the freemium model is appealing. Freemium might work if you are venture backed, but most startups never get funded. Even if you are funded a freemium model could hurt your long-term viability.

The sooner you are able to drive revenue the better. The right price will also help you prove your concept and the viability of your product. Study your competition, survey your customers and you will be able to come up with the right pricing model.

No matter how great an entrepreneur you are you can never completely eliminate risk. The key to minimizing risks is to expect them to happen and to make the proper preparation.

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