Top Financial Risks Facing Small Businesses and How to Manage Them

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Information
in
the
Business
Financing
Blog
is
provided
for
general
information
only,
does
not
constitute
financial
advice,
and
does
not
necessarily
describe
Biz2Credit
commercial
financing
products.
In
fact,
information
in
the
Business
Financing
Blog
often
covers
financial
products
that
Biz2Credit
does
not
currently
offer.

Only
50%
of
small
businesses
survive
five
years
of
business.
It’s
not
hard
to
understand
why.
What
often
starts
with
just
an
entrepreneurial
passion
and
a
few
local
customers
leads
to
growth,
expansion,
competition,
and
operational
hurdles.
While
a
50%
survival
rate
may
be
an
intimidating
number
to
face,
if
you’re
committed,
smart,
and
understand
the
risk
that
come
your
way,
you
can
be
one
of
the
success
stories.

One
of
the
first
steps
toward
putting
your
business
on
solid
footing
is
creating
a

financial
risk
management
strategy
that
helps
you
deal
with
whatever
comes
your
way.

3
Key
Takeaways

1. The
   top
   risks
   facing
   small
   businesses
   are
   cash
   flow
   issues,
   credit
   risks,
   and
   market
   volatility.
2. Small
   business
   owners
   can
   mitigate
   risk
   through
   finanical
   risk
   management,
   including
   smart
   planning,
   diversified
   revenue,
   and
   a
   focus
   on
   liquidity.
3. Financial
   risk
   management
   tools
   and
   a
   risk-aware
   culture
   can
   help
   you
   increase
   your
   chances
   of
   success.

In
this
article:

Common
Financial
Risks
for
Small
Businesses

Being
in
business
comes
with
inherent
risk.
You’ll
have
to
deal
with
cash
flow
issues,
market
volatility,
operational
failures,
and
in
some
cases,
compliance
risks.
Being
aware
of
these
common
issues
can
help
you
prepare
for
them
so
that
when
a
problematic
situation
arises,
you
can
take
action
using
a
financial
risk
management
strategy
without
suffering
long-term
consequences.

Cash
Flow
Issues

Cash
flow
problems
can
arise
from
a
variety
of
sources—customers
may
fall
behind
on
payments,
operational
costs
may
unexpectedly
go
up,
or
expenses
may
increase.
When
this
happens,
it
can
affect
your
ability
to
repay
debt,
pay
employees,
or
purchase
inventory,
threatening
your
company’s
very
existence.

For
example,
if
a
large
client
changes
from
net
30
to
net
45,
you
may
not
have
enough
cash
flow
to
pay
your
employees
or
suppliers.
Proactive
cash
flow
management,
like
keeping
a
large
cash
reserve,
can
help
solve
some
of
these
issues
before
they
occur,
and
can
help
with
debt
planning
strategies.

Credit
Risks

Small
business
credit
risks
refer
to
the
possibility
that
customers
or
clients
won’t
pay
their
bills
at
all.
While
late
payments
can
disrupt
your
cash
flow,
customer
defaults
can
be
disastrous
for
your
company’s
survival.
You
can
protect
against
credit
risks
by
using
credit
checks
before
extending
credit
and
issuing
clear
payment
terms.

Market
Risks

Economic
risk
in
business
often
comes
from
the
market.
While
the
market
is
outside
your
control,
changes
that
happen
in
the
market
can
dramatically
affect
your
revenue
and
profitability.
For
most
companies,
customer
demand
will
shift
when
inflation
increases,
during
times
of
recession,
or
when
new
competitors
enter
the
market.
As
many
as

49%
small
business
failures
happen
because
of
market
risk,
according
to
the
Commerce
Institute.

It
doesn’t
even
take
a
global
pandemic
or
stock
market
crash
to
feel
an
impact
on
revenue,
either.
Things
as
simple
as
road
construction
or
a
city
installing
parking
meters
in
front
of
a
restaurant
or
other
brick
and
mortar
company
can
lead
customers
to
look
elsewhere.
Or
an
increase
in
federal
interest
rates
can
shift
buyer
demand
from
one
industry
or
product
to
another,
for
example,
driving
people
to
change
behaviors
from
searching
for
a
new
house
to
buy,
to
searching
for
home
renovation
supplies.

To
manage
market
risks,
diversify
your
product
or
service
offerings,
stay
informed
about
market
trends,
and
be
prepared
to
pivot
your
business
strategy
in
response
to
economic
changes.

Related:

Emerging
Trends
in
Business
Financing

Operational
Risks

Operational
risks
can
be
hard
to
identify,
because
they
are
often
part
of
the
status
quo
of
your
business
and
you
may
not
notice
the
issue
until
it’s
too
late.
Often,
operational
problems
come
to
the
forefront
when
a
longtime
staff
person
leaves,
and
a
new
hire
uncovers
unconventional
workflows,
or
a
customer
is
lost
because
a
key
step
was
missing
from
a
process
map.
To
mitigate
operational
risks,
hold
regular
internal
audits
and
have
business
continuity
planning
sessions
to
prepare
for
potential
disruptions.

Compliance
and
Regulatory
Risks

Unless
you’re
a
law
office,
most
small
businesses
aren’t
staying
on
top
of
legal
and
regulatory
changes.
It’s
enough
work
just
trying
to
keep
up
with
customer
demand!
Unfortunately,
failing
to
comply
with
regulations
can
lead
to
costly
fines,
legal
action,
and
damage
to
your
reputation.
You
can
keep
up
to
date
on
compliance
and
regulatory
risks
by
joining
industry
affinity
groups
on
LinkedIn
or
Facebook,
or
by
consulting
with
a
lawyer
once
or
twice
a
year.

5
Strategies
for
Managing
Financial
Risks

1. 
   Create
   Robust
   Financial
   Plans:
   Financial
   risks
   are
   going
   to
   come
   your
   way,
   the
   question
   is,
   how
   will
   you
   prepare
   for
   them?
   
   Forecasting
   and
   budgeting
   are
   essential
   for
   planning
   for
   the
   future,
   whether
   it
   contains
   steady
   growth
   or
   some
   speedbumps.
   Make
   sure
   your
   forecasts
   are
   accurate
   by
   building
   them
   on
   top
   of
   data
   from
   past
   performance,
   then
   using
   inputs
   from
   your
   five
   year
   plan
   and
   strategy.
   Detailed
   financial
   plans
   also
   provide
   a
   roadmap
   for
   growth
   and
   can
   be
   instrumental
   when
   seeking
   investment
   or
   
   loans.
2. 
   Diversify
   Revenue
   Streams:
   When
   you
   started
   your
   business,
   chances
   are,
   you
   had
   a
   single
   source
   of
   revenue—one
   product
   or
   service
   that
   landed
   you
   your
   first
   customers.
   But
   as
   time
   goes
   on,
   it’s
   smart
   to
   diversify
   your
   revenue
   through
   additional
   products
   and
   services.
   This
   way,
   if
   one
   revenue
   source
   runs
   into
   trouble,
   you
   can
   still
   count
   on
   cash
   flow
   from
   the
   others.
3. 
   Maintain
   Liquidity:
   It’s
   tempting
   for
   small
   business
   owners
   to
   pull
   all
   the
   cash
   out
   of
   their
   business,
   either
   through
   reinvesting
   in
   the
   company
   or
   by
   making
   owner
   payouts.
   But
   if
   you
   follow
   this
   strategy,
   when
   tough
   times
   come,
   you’ll
   be
   in
   trouble.
   It’s
   better
   to
   maintain
   adequate
   liquidity
   so
   that
   when
   unexpected
   expenses
   come
   up,
   or
   you
   have
   revenue
   shortfalls,
   you
   can
   stay
   afloat.
   Having
   a
   line
   of
   credit
   or
   access
   to
   short-term
   
   financing
   can
   also
   be
   a
   valuable
   safety
   net.
4. 
   Implement
   Internal
   Controls:
   When
   you’re
   in
   startup
   mode,
   internal
   processes
   and
   procedures
   can
   feel
   like
   the
   wild
   west.
   But
   as
   your
   business
   grows,
   you’ll
   need
   to
   implement
   operational
   risk
   controls.
   These
   can
   both
   help
   prevent
   error
   and
   stop
   fraud
   from
   happening.
   What
   does
   this
   look
   like?
   It
   can
   be
   as
   simple
   as
   clearly
   identifying
   who
   is
   responsible
   for
   each
   area
   of
   your
   business
   and
   requiring
   multiple
   approvals
   for
   major
   decisions,
   as
   well
   as
   incorporating
   regular
   inventory
   checks.
5. 
   Stay
   Informed
   on
   Regulatory
   Changes:
   Since
   regulatory
   issues
   pose
   a
   significant
   risk
   to
   many
   businesses,
   staying
   abreast
   of
   regulatory
   changes.
   As
   already
   noted,
   you
   can
   join
   industry
   groups
   or
   consult
   with
   an
   attorney,
   or
   you
   may
   join
   industry
   newsletters.
   This
   is
   not
   an
   area
   to
   be
   passive
   about,
   as
   you
   don’t
   want
   to
   be
   caught
   unawares
   by
   a
   change
   in
   laws.
   Being
   proactive
   in
   this
   area
   can
   also
   help
   position
   you
   as
   a
   thought
   leader,
   potentially
   bringing
   in
   new
   business
   or
   opening
   up
   new
   revenue
   streams.

Risk
Management
Resources
for
Small
Businesses

Software
platforms
like
QuickBooks,
Xero,
and
FreshBooks
can
help
you
track
expenses,
implement
cash
flow
management
techniques,
and
forecast
financial
performance.
Because
these
tools
offer
real-time
data
and
analytics,
they
can
help
you
make
better
decisions
that
are
backed
by
data.
As
an
added
perk,
most
offer
automation
tools
that
can
save
you
time
and
reduce
accounting
errors.

Seeking
advice
from
financial
advisors,
accountants,
and
consultants
can
provide
valuable
insights
into
managing
financial
risks.
Professional
guidance
can
help
businesses
navigate
complex
financial
landscapes,
develop
robust
financial
strategies,
and
implement
compliance
risk
mitigation.
Regular
consultations
can
also
assist
in
identifying
potential
financial
threats
and
opportunities
for
growth.

Staying
educated
on
financial
risk
management
through
courses,
webinars,
and
industry
publications
can
enhance
a
business’s
ability
to
anticipate
and
mitigate
risks.
Continuous
learning
ensures
that
business
owners
and
managers
are
aware
of
the
latest
financial
trends,
tools,
and
best
practices.
This
proactive
approach
to
education
can
significantly
improve
a
business’s
resilience
and
adaptability
in
an
ever-changing
economic
environment.

Building
a
Risk-Aware
Culture

Educating
employees
on
the
importance
of
risk
management
fosters
a
culture
of
awareness
and
responsibility.
Training
programs
can
equip
staff
with
the
knowledge
to
identify
and
address
potential
risks,
ensuring
that
everyone
is
proactively
engaging
in
financial
health
monitoring.

Promoting
transparency
and
open
communication
about
financial
health
can
help
identify
risks
early.
Employees
should
feel
comfortable
reporting
concerns
and
suggesting
improvements.
Regular
meetings
and
feedback
sessions
can
create
an
environment
where
potential
issues
are
openly
discussed
and
swiftly
addressed,
contributing
to
overall
business
stability.

Conclusion

Financial
risk
management
planning
is
essential
for
the
stability
and
growth
of
small
businesses.
By
understanding
common
financial
risks
and
implementing
proactive
strategies,
businesses
can
safeguard
their
financial
health
and
support
sustainable
growth.
Invest
time
in
robust
financial
planning
for
risk
management,
utilize
the
right
tools,
and
foster
a
risk-aware
culture
to
mitigate
potential
threats.

FAQs

What
are
the
most
common
financial
risks
for
small
businesses?

Common
financial
risks
include
cash
flow
issues,
credit
risks,
market
risks,
operational
risks,
and
compliance
and
regulatory
risks.
Investment
risks
for
small
businesses
may
also
be
present
if
you
own
rental
property,
stocks,
or
other
investment
assets.
Consider
using
a
small
business
risk
assessment
to
see
how
much
risk
your
company
faces.
Depending
on
your
risk
factors,
you
may
also
want
to
engage
in
interest
rate
risk
management.

How
can
small
businesses
effectively
manage
credit
risk?

Managing
credit
risk
in
small
businesses
can
be
done
by
conducting
thorough
credit
checks
on
customers,
setting
clear
credit
terms,
and
regularly
monitoring
accounts
receivable.
You
may
also
be
able
to
use
business
insurance
for
risk
management.

What
tools
can
help
in
managing
financial
risks?

Financial
management
software
like
QuickBooks,
Xero,
and
FreshBooks,
along
with
professional
advice
from
financial
consultants,
can
help
manage
financial
risks
effectively.

How
does
diversifying
revenue
streams
help
manage
financial
risks?

Diversifying
revenue
streams
reduces
dependency
on
a
single
source,
providing
a
buffer
during
economic
downturns
and
mitigating
the
impact
of
revenue
fluctuations.

Why
is
it
important
for
small
businesses
to
stay
informed
about
regulatory
changes?

Staying
informed
about
regulatory
changes
helps
businesses
remain
compliant,
avoid
legal
penalties,
and
adjust
operations
to
align
with
new
requirements.

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