How to Reduce Risk in Your Small Business

Every now and then, you’ll meet a risk-taker or daredevil who happens to run a small business, but you won’t find many of them. Most of these folks are jumping out planes, scaling large rock faces, and running with reckless abandon – not crunching numbers, developing marketing campaigns, and making sales pitches in corner cafes.

By and large, small business owners and entrepreneurs are risk-averse. Not in the sense that they never take chances, but rather that they mitigate risk whenever possible. In doing so, they increase their chances of being successful.

Small business owner

If this sounds like you, there are some practical steps you can take to reduce risk in your small business and enjoy a brighter, healthier outlook in the years to come.

1. Structure Your Business Properly

The first key is to structure your business in a way that removes as much personal liability as possible from the equation. In other words, you want separation between your business finances and your personal finances. An LLC is a huge step up from a sole proprietorship.

“In this business structure, profit passes through to the owner as it does in a sole proprietorship,” entrepreneur Ted Devine explains. “If your LLC is sued, your personal assets, such as your home or your savings, are generally safe because you usually aren’t liable for the business’s debts.”

2. Purchase the Right Insurance

Simply using a specific structure for your business doesn’t reduce all risk. You also need the right insurance policies in place to help you in the instance that something unforeseen happens.

Slip and fall accidents are extremely common. As Davis, Saperstein & Salomon P.C. explains, all it takes is snow and ice, slippery floors, a spill, cluttered workspaces, uneven surfaces, open holes, or insufficient lighting to result in an accident. And if you don’t have some sort of liability insurance in place, a single incident could bankrupt your business.

Female entrepreneur checking business plan

3. Create a Contingency Plan

You always need to be aware of your financial situation and what your business would do if revenue dried up and you weren’t making any money. One of the smartest steps you can take is to come up with a contingency plan and set aside some cash to get you through three to six months of drought.

“In the contingency plan, ask where your business would be three to six months from now if you lost your biggest client,” says Scott Lovingood, CEO of The Wealth Squad. “Which expenses could you cut? Which would you have to keep paying?”

You can learn a lot from an exercise like this. It’ll also provide you with the confidence you need to survive little hiccups and speed bumps that you experience along the way.

4. Get Everything in Writing

As you’ve probably learned by now, people can’t be trusted. Someone will say something to your face and then deny it a week later when it comes time to execute on that promise. That’s why it’s so important to get things in writing.

You might long for the days where handshake agreements were rock solid, but we, unfortunately, don’t live in a world like this anymore. Contracts, documentation, and meticulous record keeping are needed in order to maximize protection and look out for your own best interests.

Reduce Risk, Increase Longevity

Nobody is saying you have to completely cut risk out of the equation, but you certainly don’t want to expose yourself to unnecessary challenges that have the potential to rip your business at the seams. By eliminating common pain points that have derailed countless business owners before you, you can limit your risk and increase longevity. As an added bonus, you’ll also find it easier to sleep at night.