Managing Risk in Your Business

Quite often you will hear investment managers talk about managing risk.? Do you wonder if that same thinking is valuable in running your business?

?

While those in the investment world may talk about diversifying your portfolio or buying a put option when they buy a specific stock, you can apply much of this same thinking in how you lead and manage your business.? This is true both for strategic moves you can make as well as in how your run your business day to day.

?

Here are three examples of managing risk in the strategic side of your business;

?

·????? How you legally structure your company.? Do you want to be a sole proprietorship or a general partnership where your personal assets are also at risk?? Or, do you want to form a corporation or LLC to limit (or eliminate) your personal liability?? Also, if you have a risker side of your business – say you have a decent sized trucking operation to make deliveries to customers – you may want to put those trucking operations in a separate company to protect your primary business.

?

·????? Have a strong balance sheet.? As your business succeeds and grows you may want to hold back on distributions to build your balance sheet.? This will provide you will a cushion if trouble hits in the future.? A key customer may go out of business, the economy may go into recession in the country or in your region or bank lending requirements may change.? An unexpected opportunity may pop up and you will be able to take advantage of it while your competitors can not.

?

·????? Monitor your customer concentration.? While there is nothing like developing a growing relationship with a large, successful customer, you must also be careful not to end up with too much customer concentration.? If that wonderful, large customer changes direction it can put your business in jeopardy.?Two common guidelines on customer concentration are to not allow a single customer to be more than 20% of your revenue and don’t allow your top five customers to total more than 50% of your revenue.

?

?

Then, there are many ways to can manage risk in your day to day operations as well.? That can be training someone to back up another person’s role, consistently holding tailgate safety sessions or, having a solid policy to collect receivables.

?

Of course, these are just a few examples of managing risk.? The key is to step back, think through the various aspects of your business and where the potential risks might be.? Then, develop a plan – even a simple plan – to manage or mitigate that risk.? Not only will you begin to manage those specific risks, you will find that your business will begin to operate better overall.