7 Financial Threats to Your Business (and How to Protect Against Them)

Despite whatever other motivations you have when starting a business, your organization will succeed or fail depending on its ability to remain financially stable. You’ll need to generate revenue, keep your debts in order, and spend enough to grow without jeopardizing your operating capacity. That’s a delicate balance to strike, especially considering the sheer number of financial threats that could prevent your business from taking off.

Fortunately, it’s possible to proactively identify and guard against these threats—long before they have the opportunity to hurt your business.

The Biggest Financial Risks

So what are the most common or most intensive financial risks your business might face?

1. Accidents and injuries. If your business is responsible for a construction accident, if your products are found to be harmful, or if your neglect has resulted in dangerous conditions for your customers or employees, you could be forced to pay a large settlement. Even if you manage to defend yourself in court, you may still be forced to pay legal fees. In any case, a legal problem can cost your business both financially, and in terms of your reputation. You can protect yourself from these potential incidents by working with a lawyer proactively to reduce your legal vulnerabilities, and by getting a good liability insurance policy to protect you from the potential losses.
2. Cash flow. Cash flow has the power to kill even profitable businesses. Cash flow essentially refers to how much liquid capital your business has access to, and how that amount changes over time. If your cash flow goes negative (i.e., if you don’t have enough capital to pay your employees or your bills), you may not be able to recover. You can protect your cash flow by monitoring it religiously, staying on top of your sent invoices, and delaying payments until the last possible date.
3. Rising prices. If you have a carefully balanced profitability model, a single increase in your vendors’ prices could spell disaster for your business’s ability to make money. For example, if the cost of your raw ingredients doubles, you may have to raise prices to keep your profit margins—turning your customers away in the process. Negotiating better deals with your vendors and building in conservative future price estimates can help reduce your risk profile here.
4. Low sales. Many businesses die simply because they don’t have enough customers. Their overhead, sales price, and material costs are all in order, but without enough paying customers, they simply dry up. More intensive market research can help you identify potential problem areas, and help you brainstorm solutions for those problems. Then, more attention to your marketing, advertising, and sales strategies can help you grow your customer base.
5. Overspending. Overspending on areas that aren’t helping you generate revenue can quickly exhaust your business. For example, if you’re spending too much on marketing and advertising, and not enough on the quality of your products, you might run out of money before you have enough customers or brand recognition to maintain the business. You can overspend in almost any category of your business’s expenses, but with careful planning and frugality, you can avoid many of the risks here.
6. Premature growth. It’s natural to be excited about your business’s potential for expansion, especially if you’re looking to become a corporation with national reach. However, investing too much too quickly in your expansion can be problematic as well. If you hire too many people, you may not be able to afford to keep paying them before you reach your sales targets. If you invest in too many buildings or leases, you could easily run out of funds.
7. Competitive pressure. Competitive pressure can stand in its own category, but it can also have a financial impact on your business. If a new competitor emerges, offering products like yours for half the price, it may be tough to slash prices to match them without jeopardizing your profitability. The biggest key to success here is finding alternative ways to differentiate your business and show value to your customers; if you can’t meet your competitors’ prices, offer higher-quality products or better customer service.

Proactive vs. Reactive Strategies

The biggest high-level takeaway you can glean from these financial threats is that it’s far better to engage in proactive strategies (designed to prevent or eliminate a problem before it grows to threaten you) rather than reactive strategies (merely trying to save the business after one of these problems arises). It’s unlikely you’ll be able to run your business consistently without any financial threats, but the vast majority of financial threats are manageable. Stay vigilant with your revenue, profitability, risk management, and budget, and you should be able to steer clear of these most common failure points.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.