15 Ways to Minimize Financial Risk Every Entrepreneur Should Know

To shed light on the financial risks often overlooked by entrepreneurs, we’ve gathered insights from fifteen seasoned professionals, including CEOs and founders. From considering opportunity cost and A/B testing to the importance of establishing an emergency savings account, these experts share their invaluable experiences and advice on ways to minimize financial risk.

• Consider Opportunity Cost and A/B Testing
• Account for Health Insurance Costs
• Manage Time with Reporting and Metrics
• Acknowledge Opportunity Cost of Career Change
• Secure Legal Rights to Your Brand
• Be Mindful of Credit Risk
• Don’t Underestimate Time to Profitability
• Implement Proactive Cash-Flow Management
• Invest in Online Reputation Management
• Hire Quality Experts, Avoid Financial Loss
• Forecast Operational Cash-Flow Requirements
• Ensure Personal Financial Security
• Prepare for Unforeseen Costs
• Keep Personal and Business Finances Separate
• Establish an Emergency Savings Account

Consider Opportunity Cost and A/B Testing

I’ve navigated the complex financial landscape of entrepreneurship firsthand. One significant, often overlooked, financial risk I’ve observed is the pervasive opportunity cost attached to every decision made. Entrepreneurs, engrossed in their venture’s daily demands, may neglect to consider the value of alternative opportunities and potential strategic pivots that could yield higher returns or long-term stability.

Additionally, many entrepreneurs fall into a binary thinking trap, seeing choices in black and white, which oversimplifies the nuanced decision-making process necessary for financial success. Adopting a more dynamic approach, like incorporating regular A/B testing, offers a safety net. This strategy not only minimizes financial risks but also deepens understanding of customer behaviors and preferences, ultimately leading to more informed and calculated business decisions.

Blake Mischley, CEO and Co-Founder, MeetYourClass

Account for Health Insurance Costs

The cost of health insurance is something that I personally overlooked when leaving my job to start my personal-injury law firm. My old job paid 100% of my family’s health insurance premiums. My wife works part-time, so her job does not provide health insurance. I have often joked that I wish she worked for the government. 

Our health insurance premiums are over $1,600 for just the two of us, despite us being very healthy. For many businesses, $20,000 in additional cost could be the difference between being profitable or not being profitable.

Hunter Garnett, Founder, Garnett Patterson Injury Lawyers

Manage Time with Reporting and Metrics

After working with hundreds of entrepreneurs, the most significant financial risk that founders overlook is… time.

In the early stages of building a business, time can be the most threatening financial risk due to ongoing, and often immaterial, costs that accumulate ahead of sales momentum. As a startup, operating without a sense of urgency can lead to unexpected consequences that stifle growth.

A good way to mitigate the risk of time is to create consistent reporting and metrics that drive short-term goals towards long-term results. Examples of reporting include burn rate, sales conversion metrics, customer acquisition costs, and of course… your budget!

Roman Villard, Founder, Full Send Finance

Acknowledge Opportunity Cost of Career Change

Leaving a stable job to chase a dream is an exhilarating decision, but one that comes with its own set of financial challenges. In my own journey, I walked away from a six-figure salary to pursue my passion. Many entrepreneurs, including myself, often overlook the immense opportunity cost associated with this leap of faith. It’s not solely about the salary you leave behind. 

There’s also the potential for raises, bonuses, and career advancement you might be setting aside. While it’s vital to follow one’s passion, it’s equally crucial to acknowledge and prepare for the financial sacrifices that often accompany such decisions.

David Kemmerer, Co-Founder and CEO, CoinLedger

Secure Legal Rights to Your Brand

One risk that I see entrepreneurs overlook is not securing the legal rights to their brand through federal trademark registration. Federal trademark registration provides exclusive legal rights over the brand identifiers to the small business. This enables the trademark owner to prevent others from infringing and diluting their brand. 

Moreover, a proper trademark registration process starts with a comprehensive clearance search that will identify any existing marks that you may be infringing upon. Identifying these conflict marks early and securing the rights to your brand will save you time and resources down the road.

Alex Toporek, Trademark Attorney, Toporek Law

Be Mindful of Credit Risk

In my journey as a business leader, I’ve noticed a recurring issue: a bunch of new entrepreneurs often overlook something called credit risk. Credit risk is the risk of not getting paid by customers or borrowers, which is usual in the early stage of a business as there’s a natural excitement by owners to see their business grow and make a mark. In this rush, some business owners might offer services or products without ensuring that their clients can pay them back on time. 

As entrepreneurs hustle to expand, sometimes their judgment takes a backseat. If they end up with a bunch of customers who are slow to pay or, worse, don’t pay at all, it can really disrupt their cash flow. To put it simply, while aiming for big goals is great, it’s equally important for business owners to be mindful of who they’re doing business with. Ensuring clients can pay on time is key to keeping the business healthy in the long run.

Lorenzo Nourchan, CEO, Northstar Financial Consulting Group

Don’t Underestimate Time to Profitability

One significant financial risk that entrepreneurs often overlook is underestimating the time it takes to achieve profitability. Many entrepreneurs have a clear vision for their business and may even have a solid business plan, but they can underestimate the amount of time and resources required to turn a profit.

James Edge, CEO, Dooey

Implement Proactive Cash-Flow Management

According to the U.S. Bureau of Labor and Statistics, an average of 47% of small businesses fail within the first five years due to cash flow problems. What many don’t realize is that proactive cash-flow management can significantly drop the financial risk of business failure. 

Entrepreneurs often make investment and spending decisions based on the premise that there is “money in the bank.” However, this doesn’t consider fluctuating sales and unexpected expenses. 

As more money comes in, you keep investing that money back into the business because you know that that is part of how you keep growing. If you are not managing your cash flow or forecasting what your business needs in the next six to twelve months, it can very quickly get out of control and leave you with an abrupt cash shortage. 

A priority should be to get a cash-flow management and forecasting system in place to mitigate the all-too-real financial risk of failure.

Deirdre Harter, Co-Founder, CPA, Business Strategist, Encore Empire

Invest in Online Reputation Management

A major financial risk entrepreneurs often miss is neglecting online reputation management. In our digital era, a single negative review can lead to significant financial setbacks. 

While many prioritize product or sales, they sideline their online image. But in a world where consumers trust online reviews, overlooking digital reputation can be costly. It’s not merely about countering negative feedback but actively cultivating a positive online presence. At Ignited Results, we’ve seen how a strong reputation boosts trust and revenue. Entrepreneurs should view online reputation as an essential investment.

Jon James, CEO, Ignited Results

Hire Quality Experts, Avoid Financial Loss

Back in 1985, when establishing an online plant nursery, a significant risk was faced. The expenses involved in hiring full-stack developers, designers, conversion specialists, and website platform costs were underestimated. Initially, low-end experts were hired, but it was soon realized that in the digital world, you get what you pay for. 

Hiring low-end developers can be a financial risk because if they do not deliver quality work, it can result in a total loss. Having to replace them with elite experts can lead to substantial costs and losses. Therefore, it was learned that it is crucial to hire top experts in their fields to avoid such risks.

Tammy Sons, CEO, TN Nursery

Forecast Operational Cash-Flow Requirements

One significant financial risk that I’ve observed entrepreneurs often overlook is the underestimation of operational cash-flow requirements. Many budding business owners meticulously plan for initial startup costs, but they fail to adequately forecast ongoing operational expenses against realistic revenue projections. 

In the exhilaration of launching a new venture, it’s easy to be optimistic about sales growth while underestimating expenses like rent, utilities, salaries, and marketing costs. This mismatch can lead to cash-flow shortages, even if the business is showing a profit on paper. Always maintain a detailed, rolling cash-flow forecast and regularly update it. Account for all potential expenses and be conservative with revenue projections. Having a safety net and being prepared for potential shortfalls is vital for long-term entrepreneurial success.

Tim Pelletier, Owner/SEO Consultant, Tim Pelletier Consulting, LLC

Ensure Personal Financial Security

As someone who has advised startups on financial planning for over 15 years, there is one significant risk that entrepreneurs far too often overlook: lack of personal financial security.

The most overlooked financial risk for entrepreneurs is a lack of personal savings and security. In the effort to make their venture successful, founders often drain accounts and go without income to fund the business. This leaves nothing to fall back on if the business fails or a personal emergency arises.

My advice is to always set aside 6-12 months of personal living costs and not touch retirement if possible, before pouring everything into the company. These emergency savings provide a safety net against financial ruin from business or life interruptions.

Securing personal finances first reduces stress and enables smart business risks. Overlooking personal security is common but easily avoided with proper planning.

Rahul Paragi, Founder, NamesPilot

Prepare for Unforeseen Costs

Unforeseen costs can result from components breaking, regulatory fines, and legal fees.

Entrepreneurs often start businesses on a shoestring budget, but they should always have an emergency fund. There are many predictable issues with starting a business, like slow demand, limited revenue, and little brand recognition.

It’s easy to forget about the everyday things that can go wrong, like a piece of equipment or software not working out of nowhere. These are the kinds of things you only think about when they go wrong, like the plumbing in your house. When you are in business risk analysis mode, don’t forget to consider these everyday issues.

When it comes to setup costs, entrepreneurs often neglect to budget for what happens when things go wrong. For example, an unexpected legal issue can be costly.

When you are only planning for certain kinds of emergencies, you leave yourself vulnerable to these unexpected happenings.

Domenic Pietra, Operations Manager, Prime Dumpster

Keep Personal and Business Finances Separate

A financial concern that many people fall prey to is when their personal finances are directly affected by their businesses. This happens when people use their personal money and credit cards in order to fund certain aspects of their businesses. When they use their personal credit cards for inventory purposes or to upgrade their equipment, they are driving their bills up unnecessarily. 

Additionally, the interest rates on these purchases will put their personal credit scores at risk if they cannot make the repayments. They can alternatively acquire a business credit card or take out a business loan tailored to their specific needs. Keep all business and personal transactions separate at all times. 

In terms of bank accounts, if they mix the two up, they will have difficulty tracking their business expenses and run the risk of having their banks close their personal accounts if they do not heed their requests to keep business transactions in separate accounts.

Ashwin Ramesh, CEO, Local SEO Checklist

Establish an Emergency Savings Account

Being unprepared for a rainy day, many entrepreneurs are not properly prepared to face hard times. You need an emergency savings account to stay afloat during rainy days. Six months’ worth of operating expenses is ideal for an emergency fund. You will regret not having a stash of funds available to you for tough times should they arise. 

From my experience, as well as some of my colleagues’, this is a significant financial risk that can be hard to bounce back from and could ultimately be the demise of an entire endeavor depending on the nature of the emergency or situation.

Saad Alam, Co-Founder and CEO, Hone Health

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