- Small businesses, significant to the US economy, faced unprecedented challenges due to the 2020 pandemic.
- Risks in starting a small business include poor planning, lack of market demand, regulatory compliance, and employee liability.
- A solid business plan and thorough market research can counteract poor planning and lack of market demand.
- Hiring professionals can handle compliance with regulations and laws and manage employee liability.
- Risk reduction strategies include outsourcing risk management, automating business processes, and diversifying the business model.
Starting a small business is one of an entrepreneur’s most exciting and rewarding experiences. You’ll learn so much about yourself and the business world as you work to turn a passion into a profitable enterprise. However, along with all the good stuff comes a range of risks you must be aware of before diving in headfirst. Here’s a look into small businesses today, the most common risks in starting a small business, and ways to reduce these risks.
Small Businesses Today
It’s estimated that there are 33 million small businesses in the United States alone, accounting for 99.9% of all U.S. companies and employing 57 million people. Small businesses make up a significant portion of the US economy, providing valuable goods and services to communities nationwide.
In 2020, many small businesses faced unprecedented challenges due to the coronavirus pandemic. The economic downturn, combined with the need to switch to remote work quickly and increased competition in the online world, has made it difficult for small businesses to survive. As a result, many are now looking for ways to reduce risk and operate more efficiently.
Common Risks in Starting a Small Business
Entrepreneurs must be aware of several common risks when starting a small business. Here are some of them:
Poor Planning and Financial Management
One of the most significant risks you’ll face when starting a small business is not planning everything out correctly or not having a solid handle on your finances. This is particularly true for those self-funding their venture, as you’ll need to manage your cash flow carefully. Start by creating a business plan and budget, considering all your expenses and potential income sources.
Lack of Market Demand
Another significant risk when starting a small business is the lack of market demand for your product or service. Before you start your venture, do plenty of research to see if there is a need for what you’re offering. Determine who your ideal customer is and if they are willing and able to spend money on your product or service.
Legal and Regulatory Compliance
Small business owners have a range of regulations and laws they need to comply with, which can be incredibly challenging if you’re not familiar with legal jargon or procedures. Hire an attorney to help you ensure you’re following all the legal requirements for your business. This can include registering your business with the state and obtaining proper licenses and permits.
If you plan to hire employees for your small business, you need to be aware of the potential liability and legal issues that come along with it. This includes legal requirements for paying employees minimum wage, providing workers’ compensation insurance, and following proper termination procedures. Investing in an HR consultant or HR software can make this aspect of running your business much smoother.
Ways to Reduce Risk
There are various ways to reduce risk in starting a business. Here are three strategies to reduce those risks.
Outsourcing Risk Management
The first and most effective strategy is outsourcing risk management to professionals who know what they are doing. There are plenty of benefits of outsourcing risk management to professionals. It’s a great way to save on overhead costs. You can also get a more knowledgeable perspective on the risks associated with your business and how to mitigate them proactively.
Automating Business Processes
Automating business processes is another way to reduce risk in starting a small business. This includes using technology solutions such as accounting software, customer relationship management (CRM) software, and automated invoicing systems. Automating processes can help you save time, money, and energy that would be spent manually managing tasks.
Diversifying Your Business Model
Lastly, diversifying your business model can also reduce risk. This may include expanding into new markets or products or providing services to existing clients. Diversifying your business model can help you reduce the risks of relying too heavily on a single income stream.
Starting a small business is an enriching experience, but it will come with some risks that entrepreneurs must be aware of. By understanding the most common risks, having a solid plan in place, and reducing risk through outsourcing and automation, you can set yourself up for success in the long run.