Using Risk Management To Secure Your Startup
Risks are an inevitable part of any startup. Every business faces the threat of unexpected and harmful events that can cost a company money, or cause it to shut down permanently. The most important tasks every entrepreneur must learn to handle is assessing risks and successfully mitigating bad risks to maximize the chances of success.
What Is Risk Management?
Risk management is the process of discovering, evaluating, and eliminating threats to a company’s capital, earnings, and profits. Risk management plans need to be the top priority for any digitized company. A successful risk management plan should include a company’s procedure for identifying and managing threats to its assets.
Types Of Risks For Startups
Threats faced by startups can steam from a variety of sources, including strategic management errors, financial errors, legal liabilities, security threats, natural and accident disasters, and data related threats.
Here, we have highlighted five ways you can use risk management to secure your startup’s success.
- Form Strategic Partnerships
One major mistake startups make is trying to do everything alone. To reduce risk, consider leveraging a strategic partner. A strategic partnership refers to a business relationship between two entrepreneurs, with the main aim of helping each other achieve more success.
It can be a highly effective mitigation strategy because it allows early-stage startups to grow and expand quickly due to the shared risks.
Before starting your company, you should be strategic in your mitigation and consider business dimensions such as partnerships, incentives, structures, and business controls.
- Hire a Tax Advisor
One crucial business aspects of any startups that are usually ignored are taxes. Figuring out the rules and regulations regarding SME’s taxes may be one of the most challenging parts of starting a small business.
As complex as the process might be, tariffs can be costly to your startup if mistakes are made. For this reason, consider hiring a tax advisor. A tax advisor is a certified professional who prepares and files taxes, offers financial advice, maximizes business tax returns, and represents you and your business in case of an audit.
A business tax advisor is not someone who you only seek out during tax season. On the contrary, it’s someone you can consult with for all your business tax queries all year long.
- Have Contracts for Every Business Transaction
Managing contracts is often an overlooked form of risk management. It’s crucial to have well-thought-out and well-drafted arrangements at the ready. When two businesses decide to work together, there should be a contract that specifies the activities and terms entered into by both parties.
Contracts can have a significant effect on a startup’s profitability due to the emphasis on expenses and revenue. There are eight (8) essential contracts for startups, including:
Employment Offer Letters – This contract protects your business from legal liabilities and any misunderstanding with an employee.
Confidentiality and Invention Assignment Agreement – This agreement ensures that employees keep your company’s confidential information. It also provides that any ideas, products, inventions, and business strategies developed by an employee belong to the firm.
Service Contract – If you are in the service industry, this contract spells out your responsibilities and terms and conditions.
Confidentiality Agreement – The agreement prevents the other party from stealing or using any shared confidential information.
- Create an LLC
Limited Liability Corporations (LLC) are ideal for small business startups. An LLC prevents double taxation, which occurs when an entrepreneur chooses to start a C-Corp business structure, meaning the owner and the company are taxed separately. An LLC is taxed as a sole proprietorship.
Another benefit of using the LLC business structure is how easy it is to register and make changes. It’ll be easy for you to add new partners, sell an interest in the company to someone else, or convert to a C-Corp business structure. Finally, this business structure protects your assets against any lawsuits directed at your company.
- Protect Your Startup with Insurance
As a new business owner, you need to take out a portfolio of business insurance to protect your assets. Having insurance adds more credibility to your business. It shows potential clients that you have means of providing compensation if anything was to go wrong. First and foremost, you should offer protection to your employees because they are your greatest assets.
Other essential insurance policies include life insurance policy in the event of critical illness or death, liability insurance to cover any unexpected events, and business interruption insurance in case of natural disasters such as fire, floods, theft, or earthquakes.
Every startup faces risks, especially during the first few years of operation. It’s essential to know how to manage these threats to secure and protect the growth of your business. A successful risk management plan should highlight risks that are not apparent, reduce business liability, provide insights and support to the Board of Directors, and frame any regulatory issues.