When you’re starting your own business, you’ll have to take on a number of different financial risks to make sure your company succeeds. There are financial risks associated with your product or service, with pricing strategies, and even the possibility that you may fail as an entrepreneur. Before you start your business, it’s crucial to understand these financial risks and develop strategies to protect yourself from them as much as possible. For example, here are some things you should do to address the financial risks of entrepreneurship before you start your business.
Risk #1 - Funding Risk
Not having sufficient financing for your new business is a big risk. The majority of startups are underfunded at startup—by an average of 40 percent. Some businesses don’t get off the ground because they don’t have enough funding, while others are overly optimistic and run out of cash even before they launch their products or services.
Risk #2 - Regulation Risk
Because U.S. businesses can now operate virtually anywhere, there is a risk that an employee could accidentally violate local labor or tax laws due to a lack of knowledge about local regulations. The entrepreneur must be aware of these risks and take steps, such as hiring an in-house lawyer, to avoid them.
Risk #3 - Business Model Risks
If you're relying on selling a specific type of product, you're vulnerable if something happens to change how people buy that type of product. For example, when Blockbuster went out of business, it wasn't because their products were terrible - in fact, they were extremely profitable and highly rated by customers. The problem was that new technologies (e.g., video streaming sites like Netflix) made renting videos online more convenient and cost-effective than going out to a store and buying them outright.
Risk #4 - Competition Risk
Your biggest risk is not that you'll fail but that someone else will succeed. If you're working in a competitive field, that threat is real: You can't patent or copyright anything unique to your business, and once you're on a competitor's radar it's only a matter of time before they find a way to copy your idea or undercut your prices.
Risk #5 - Market Size and Growth Rate Risk
This is one of the most important risks for entrepreneurs. If your market isn’t large enough, or if it is growing too slowly, you will struggle to reach profitability. Some people overestimate their ability to capture a niche market and underestimate costs. Others assume that because their product or service fills a need, there will be an endless supply of customers regardless of how big or small their market is right now. Be very clear about your assumptions when launching a new business; assume nothing.