Why you must be able to manage risk

By: Danielle Thomas

Date: 23 January 2013

Why you must be able to manage risk /domino at the office{{}}The idea of entrepreneurship and the real-life, day-to-day experiences of entrepreneurship are two vastly different things. In my first serious venture our team raised $250,000 for an online financial technology start up, which was focused on educating and assisting investors to develop asset-management strategies to self-manage their own capital in various financial markets.

Our business model was strong. The company had several key revenue streams and after nine months of pre-launch development and another nine months of post-launch operations, the company finally began to make money. Then, for an additional six months the company largely broke even. And, finally, after 24 months, the company began to make enough money to make the venture worthwhile.

Through the life of our company, our team learned many lessons, but one has stuck above most. A successful entrepreneur is characterised by many attributes, but ability to manage risk is key. Most people never even consider this aspect of business, but the ability to actively manage risk is often the difference between entrepreneurs who have a great idea and entrepreneurs who actually build successful companies.

The greatest risk

The single greatest risk for any entrepreneur is running out of cash. A business fails when it runs out of cash or available credit. If a business spends more than it makes per month, that burn rate will eventually cause the business to fail once all cash is spent and available credit is used up.

Therefore, every entrepreneur should be fixated on controlling costs and managing this risk. Let’s discuss a few key points that will empower aspiring entrepreneurs to successfully manage the risk of cash flow.

Cut out the non-necessities

When starting a business it can be tempting to spend money on non-essentials, such as nice office space, beautiful office furniture, expensive computers, administrative staff, etc. This is a black hole of lost cash, however. Until a business is generating healthy net-positive monthly returns, it is wisest to keep in “bootstrap mode”. The only money spent should be what is absolutely necessary to create the business’s product or service and take it to market. Bootstrap mode may not be the most fun experience, but it’s necessary and often means the difference between a business idea and an actual business. 

Know your burn rate

A second temptation many entrepreneurs face is to ignore the numbers. “If I just keep my head down and keep moving forward, we’ll make it. The numbers are depressing, so I don’t need to look at them.” This is disastrous. As a business owner and leader, one should always have a direct pulse on the cash position of your business and how cash is flowing in and out of it. One of the most important numbers is the burn rate.  This is the amount of money you are losing each month. 

If you divide your cash reserves by the burn rate, you’ll get the maximum number of months the business can survive at its current trajectory. Know this figure at all times, and be proactive about cutting costs to extend the lifeline of the business.

Entrepreneurship is a great challenge.  Put yourself in a position of power by taking a proactive stance toward active risk management and seek to manage your cash risk by consistently keeping expenses low during the early stages of your company’s growth.

This has been a guest post by Danielle Thomas from Merchantseek.com.

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