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Tried and tested ways to reduce early-stage business risks

It is never justifiable that a small startup organization invests heavily in its infrastructure for fulfilling bulk orders right from its beginning. Even if they make detailed plans, entrepreneurs will never know the exact projection of demand with certainty. Hence, startups should reduce their starting overhead costs because there lies too much ambiguity

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Starting with big-ticket corporations to small and medium enterprises—businesses of all kinds face some inherent risk. Some could be smaller and can be dealt with quickly, while some are so dangerous that they can challenge the business’s very existence. We see that the ‘Business Risk Management’ buzzword is often thrown by so many entrepreneurs and financial risk managers. Companies invest crazy amounts of money in becoming adept at it. So far, we see that prudential risk management could happen when employees and owners closely collaborate and efficiently execute specific pre-decided policies in their businesses.

There is no shortage of startup failing horror stories in the market. The statistics are equally distressing. For example, more than half of these startups do not last for more than five years and more than 80% of startups eventually failing. However, amid these scary numbers with the startup failures, I do not think that anyone should give up their dream business idea. In my opinion, it should come as a reason to take a long and hard look at why startups fail and what should be done to avoid these risks through critical analysis.

By implementing a well-researched de-risking strategy, you will protect your business from many problems and pitfalls that can ultimately cause you to fail. It will also enhance the long-run efficiency and productivity of your company. You can also become more prominent and better at what you had always thought about your business.

Venturing into a business decision demands that you automatically assume an inherent risk of failure that may come in numerous forms—less capital to burn, very tough competition, less actual market need, and other such allied challenges. Young and budding entrepreneurs usually believe that this gamble is worth taking heads on. It is because they see it as a way of being in command of their fortunes, transforming other people’s lives, having their own schedules of doing things.  Thank Goodness, it is really possible to mitigate early-stage venture risks by calculated, calibrated, and smart steps. Here, I present some tried and tested ways to lower your business risks during the early stages.

Diversification in services and products

An old proverb goes like this—one should not place all the eggs in one basket. It does not matter if you are a service provider or a product provider—diversification is always a great business strategy. It helps in offering your clients multiple options that facilitate bringing additional streams of revenue for the company. Moreover, if you diversify your services and products—people’s interest in your company shall remain maintained. Sometimes, it might give you a leading edge over your immediate competitors. So, if you are one of those who are a single product or service-based company—then the time has come to offer more. Additionally, make sure that you do not compromise on the quality in quest of multiple options in one table.

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Documenting crucial transactions

It would prove very beneficial for your business if you introduce a habit of documenting actual transactions in your early-stage business, such as operationalization costs, taxation, sales, etc. Also, make sure that your company’s employees do it right, from balance sheets to checks.  Developing some standard operating procedures for the documentation—enabling the minimalization of errors, frauds, and thefts—shall undoubtedly help. If you remain serious with the documenting part, then you can easily track where your money is going and where it is coming from. Based on that assessment, you can quickly identify if your spending policy is actually prudent or not. It will give you an edge over your competitors as many young entrepreneurs do not spend their monies wisely.

Developing an understanding of the law

Having a basic understanding of legal compliances should be a crucial consideration while venturing into startup. As an entrepreneur, you should have a fundamental grasp of economic laws, commercial laws, environmental laws, and labor laws. For this, you can take assistance from a startup lawyer who can give you professional advice on which regulations apply to your business and what is way to avoid non-compliance penalties. It is often seen that young entrepreneurs are naive about the pitfalls and processes. A significant majority do not even know the ABC of law, and they hire too many lawyers. Business’s legal matters become a postscript as entrepreneurs are more fixated on hiring, financing, and product. Entrepreneurs must understand that law requires serious care, and it is as essential as any other part of the business.

Fixed overhead costs reduction

It is never justifiable that a small startup organization invests heavily in its infrastructure for fulfilling bulk orders right from its beginning. Even if they make detailed plans, entrepreneurs will never know the exact projection of demand with certainty. Hence, startups should reduce their starting overhead costs because there lies too much ambiguity. They can never know if their initial investments in infrastructure are recoverable from initial bulk orders. Fortunately, there is a way by which startups can quickly eliminate a significant fraction of their starting overhead costs. They should develop tactical relationships with a network of suppliers. It would prove beneficial in minimizing their fixed cost obligations.

Take smart outsourcing decisions

Outsourcing those parts of the business for which qualified expert organizations exist is a good strategy for big businesses and small startups. You can certainly do some tasks in-house. However, hiring professional organizations would usually give enhanced results at a lesser cost. Sometimes entrepreneurs develop a cold foot to the outsourcing idea due to scarce capital. Still, the reality is that unprofessional work can prove a significant liability in the long run that might have disastrous consequences afterward. Certain parts of the business, such as technology, accounting, and law, must necessarily be outsourced to professional experts for minimizing defective services and products.

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Taking help from the mentors

I often find that entrepreneurs are a bit hesitant about developing relationships with mentors. Even if they are willing, they do not know where to start. I advise them to calculate the opportunity costs between lifetime expenses and being upfront. A good business mentor can help you avoid and repeat mistakes, pick the right way, and speed up towards goals. According to Forbes, more than 90% of startups’ leaders agree that mentors directly impact the growth and long-term survivability. Global venture capitalist Dale W Wood is of the opinion, “A real intention would sometimes be enough to capture the mentor’s attention. Every occasion to connect can prove to be a chance to ask detailed questions.”

You might choose to go it all alone with your own resources and knowledge, although it might prove very expensive in terms of money and time. A good business mentor gives unbiased guidance, is quite eager to learn, listen, collaborate, and helps entrepreneurs remain focused on his long-term goals, purpose, and what else he is trying to achieve. All entrepreneurs need to do is to, first of all, show a genuine interest in listening and learning.

Winding up

The above were only some of the postulates that I hope shall help entrepreneurs reduce their early-stage business risks. Indeed, it is not a complete list, and I am entirely sure that other aspects have a critical role in a company’s success or failure. However, entrepreneurs can easily avoid any risk with meticulous management and advanced risk management mechanism. After all, business risk reduction should be any startup’s primary consideration.

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(Featured image by AbsolutVision via Pixabay)

DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.

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Alexis represents Dale W Wood, a renowned Costa Rican venture capitalist in the digital space. She has a background in digital marketing for high-value companies. Alexis has imparted an enhanced brand strategy to her clients through engaging, conversational, and value-adding content to people’s lives.