New business owners are experts in what their companies sell or provide. However, some entrepreneurs may not know as much about the financial side of running a business—including managing risk. With startups facing a steep road to survival in the first few years, it’s vital for new business owners to learn the ropes of financial risk management, even if they outsource the management of the details.
To help new business owners get a grasp of what they’ll need to know, 15 experts from Forbes Finance Council share actionable strategies below.
1. Ensure you’re operating with the correct structure.
Cross your t’s and dot your i’s. It seems like a cliché, but it is essential to have the proper business structure—LLC versus S Corp versus C Corp—to protect yourself and your business. Hire a reputable CPA and have regular one-on-one meetings. Be on the up-and-up, and don’t cut corners. It’s easy to get caught up in the day-to-day details, but it is essential for companies to have a solid financial and legal foundation. – Alan Hayon, The Credit Desk
2. Regularly review your financials.
Review and interpret accurate, reliable financial statements and key performance indicator figures as often as possible. This helps guide decision-making for immediate corrective actions should financial risks exist, as well as strategic sales, marketing and financial planning to minimize potential financial risks. – Ngu Castro, Sustainable Northwest
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3. Build a team of advisors.
Follow the ABCs: attorneys, bankers and CPAs. Attorneys and CPAs are common, but bankers have been lost in recent years. Most business owners think their banker is the guy down the road at their local branch, but that’s not the case. There are plenty of bankers who are independent and go by various titles, including investment bankers and capital advisors. – Danny P. Burke, Midstreet Capital LLC
4. Hire a CFO.
Hiring a CFO is a must. It’s the best hire I’ve made in 14 years as a financial entrepreneur. Your CFO will help you move from bottom-line, monthly-income-versus-expense thinking to forecasting revenues well into the future. They will assist with securing banking relationships for lines of credit or M&A loans. And perhaps most importantly, a good CFO will free your mind to focus on your strengths. – Evan Kirkpatrick, Wendell Charles Financial
5. Get to grips with your numbers.
Really—and I mean really— understand your numbers, including your profit and loss, balance sheet, and cash flow statement. New business owners often put most of their focus on customers and products. That’s important, but it will be hard to achieve and sustain success without thoroughly knowing your numbers, inside and out. It’s especially important to be able to anticipate and manage risk, as well. – Debbie Bianucci, BAI
6. Learn how to manage your cash.
Imperative to early-days success is the ability to manage cash. Working capital management—and the sophisticated forms it takes in large organizations—is rarely mirrored in owner-managed, early-stage enterprises. The ability of entrepreneurs to view forecast options in terms of cash vis-a-vis accrual accounting income (loss) is of utmost importance. – Gary Taube, Patriot One Technologies
7. Make sure you have plenty of capital.
Develop a financial pro forma that includes revenue and cost of goods/services assumptions. Ensure profit margins are within industry standards. Earnings before interest, taxes, depreciation and amortization should be 15 to 20% of revenue. Include a contingency for unexpected expenses. Complete a cash flow projection and obtain appropriate financing. Do not bootstrap a business—well-capitalized businesses are more likely to succeed and weather unexpected obstacles. – Mike Ford, PBO Advisory Group
8. Track everything.
My mentor, who has been a top trader for more than 30 years in the NYSE, always tells me: A big loss never comes without a warning. To minimize risk, you need to be on top of all fluctuations and changes in your company’s income and expenses. Diversify income and limit expenses and loans. Never underestimate insurance and savings—I think the quarantine made that lesson very clear for all of us. – Gabriela Berrospi, Latino Wall Street
9. Create a rainy day fund.
If there is anything that we have learned in 2020 it’s that no business is “pandemic-proof.” I strongly suggest that all businesses create a rainy day fund and save 10% of net profitability to weather any storm. Startup businesses need to launch with a treasure chest of at least six months’ worth of operating expenses as a safety cushion. – Anthony Holder, C&H Financial Services, Inc.
10. Educate yourself about credit.
Positive cash flows keep a company liquid and nimble. But most businesses will eventually face a time when their expenses exceed their income. Enter credit. Not all credit is equal, and most owners only start educating themselves about credit once they need it. My advice is to do the research before you need credit so you understand your best option. – Mia Erickson, Whitnell
11. Create a financial dashboard.
Try to create a financial dashboard that helps you understand the changes in cash and profitability on a daily basis. You can make sure this dashboard is accessible on your phone by using a simple Excel file or your ERP application. – Michael Dunleavy, Van Metre Investment Properties
12. Leverage financial management tools.
The most important things to remember are cash is king and cash management is key. To have a successful business, you need to be generating revenue, and you need to be able to track top-line performance and costs on a daily basis. To do this you need the right tools. Many entrepreneurs find value in cloud-based tools because they give the flexibility to manage finances 24/7, in any location. – Kirsty Godfrey-Billy, Xero
13. Separate your personal and business finances.
The best thing a business owner can do to minimize financial risk for their business is to keep their business finances completely separate from their personal finances. This means setting up separate bank accounts and getting financing (e.g., credit cards, loans, etc.) that is only used by the business. Keeping financial records that are completely dedicated to your business will help in the long run. – Levi King, Nav
14. Maintain an ample cash flow cushion.
On top of separating your business finances from your personal finances, it’s critical that you maintain an ample cash flow cushion. Without enough working capital, it can be difficult for your business to seize an opportunity as it arises. And when disaster strikes, cash reserves are always your best lifeline. – Ryan Rosett, Credibly
15. Be frugal until you find your product-market fit.
If you’re operating a startup, it is extremely important to be frugal until you find a clear product-market fit. The No. 1 mistake a new founder makes is spending money on marketing too soon. Don’t buy traffic in the early days. That will only give you the dangerous illusion that your business is succeeding when it is not. Save money now and spend it later when your product can sell itself. – Kristy Kim, TomoCredit