There are so many financial risks in business that it can be hard to keep track of them all. Even the most cautious and conscientious business owners have their fingers crossed every time they venture into uncharted territory with their company. There are so many risks present in any business that it is impossible to eliminate them entirely.
However, there are a few financial risks that you should be aware of if you want your company to grow and thrive long-term. These risks might seem like small annoyances now, but once they become problematic, they could take a toll on your company’s future growth.
Let’s take a look at some common financial risks that businesses face so you know what to expect from your company as it grows and develops into an established enterprise.
Lack of Initial Funding for Growth
One of the most frequently encountered financial risks for growing companies is the challenge of obtaining initial funding. While some companies obtain all their funding through private investment, most startups need to secure a portion of the funding from investors. However, most investors are reluctant to provide funding to growing companies—particularly those that are still in the early stages. As with any other financial risk, a lack of initial funding can be a huge road block for growth. Fortunately, investors are usually willing to provide funding to promising startups once they see significant progress in the business. This can be done through sales, marketing efforts, and other activities that clearly demonstrate the company’s value proposition.
Lack of Capital for Growth
A lack of capital is one of the biggest financial risks to growing a company. Let’s say you have an established business that shows healthy growth. You have a handful of customers and are expanding your workforce. Then one day, you get an unexpected phone call from your bank asking you to pay back the loan that you used to start the business. This is a very scary financial risk for any business.
If you suddenly stop receiving revenue, you might have to choose between shutting down your company or taking on more debt to stay afloat. You might also have to sell off some of your assets to stay afloat and pay back your debt. Fortunately, there are ways to mitigate the risk of a lack of capital. One is to find a strategic investor who will provide you with a bit of funding so you can continue your growth. The other is to find a large enough investor to provide you with a significant investment in exchange for significant equity in the company.
Over-reliance on Entrepreneurship Income
The earnings from your business are a double-edged sword. On one side, they provide you with a steady stream of income to fund the growth of your company. On the other side, they are dependent on the success of your business. If the company fails to meet the sales and marketing targets, it will not generate any income. This can be a major financial risk if you are too dependent on the earnings from your business.
As a growing company, you will likely have to rely on entrepreneurship income by selling your products and services to customers. You can’t expect your business to generate large profits right off the bat and you might have to wait for several years before you see a significant increase in sales. In the meantime, you will have to rely on entrepreneurship income so you can grow your business.
Inconsistent Revenue Streams
The best way to mitigate the risk of a lack of capital is to secure multiple funding rounds that provide you with a significant amount of investment. This will ensure that you have enough funds to keep your company growing. However, it is important to note that you will have to spend the majority of the funds that you receive.
As your business grows and becomes more established, it is likely that your revenue will dip at least once in a while. This is because sales cycles are unpredictable and subject to a number of external factors. If your business is relatively new, you might experience this regularly. However, if your company is mature, it might become a consistent risk as your revenue dips from time to time.
Risk of Going Public
When enough investors see the potential of your company, they might decide to invest in the stock market by buying shares of your company’s stock. This is known as going public. The company will sell a certain number of shares to investors in exchange for a lump sum of money. This is a risk-laden process that involves a lot of risk.
The shares that will be sold in the public market are speculative investments. This means that they are not backed by any real assets. Therefore, they can be a risky investment that might lose value quickly. Furthermore, the shares might be worth less than what you sold them for because the market value might decrease due to various factors.
There are a lot of financial risks that can derail your company’s growth and success. As your business grows and becomes more established, you might encounter these risks more frequently. Therefore, it is important to be aware of them. Fortunately, it is possible to mitigate the risk of these risks by finding strategic investors and ensuring that you have enough funding to keep your company growing.