- \ Gerard Gruber
- October 22, 2020
One of the most fulfilling parts of our jobs as financial advisors is not only to help our clients reach financial milestones, but to assist them in taking on new life goals in a financially savvy, and risk-averse way. For some individuals, this goal is starting their own business. But entrepreneurship comes with many risks—personal and financial—that may be more than you bargained for.
There is no doubt that entrepreneurship is exciting, and if you’re thinking of taking on the task then you might be a risk-taker by nature. However, it’s best to assess the risks associated with starting a business to evaluate if doing so is a viable option for you and your family.
Below are six of the most critical risks that accompany entrepreneurship:
1. Cash Flow Risk
For many entrepreneurs, starting a business means leaving a job or career with a steady paycheck, benefits, and stability. Some individuals are lucky enough to have a working spouse or the ability to work on the business while still at their full-time job, but even so, the goal is for the bird to eventually leave the nest. That means there will come a day when you will have to rely on your own ability to generate enough business to cover your expenses, buy your own healthcare coverage, pay business taxes and fees, possibly cover employee salaries, and save for retirement.
2. Financial Startup Risk
Depending on the type of business you plan to venture into, it’s likely you’ll need anywhere between 5K-20K stashed away to legally establish your business entity, build a website, purchase a logo, lease a storefront (if your business is not virtual), and much more. Of course, the costs will depend on what your business needs to serve clients or sell products, but there is a chance you could lose your initial investment if you don’t make a solid financial business plan.
All new businesses should build a financial plan that shows how much cash will be required to break even on your initial investment, income projections, and expected return for investors if you used any.
3. Business Development and Planning Risk
Your ability to build a viable strategic plan will be essential to your overall success. This plan allows you to see how much you need to earn to come out in the clear, how long before you can expect to see a positive return on your investment, and plans for growing the business to continue accelerating revenue 1-year, 5-years, and 10-years down the road. A failure to plan not only puts you at the financial risk of bankruptcy, but the personal risk of not being able to care for yourself and your dependents. Moreover, this piece of the puzzle will become essential if you are trying to secure investors now or in the future.
4. Consumer Interest Risk
Entrepreneurs tend to be visionaries. We are naturally passionate by nature and will likely do anything we need to need to do to see our vision come to life. Sometimes, though, this unrelenting drive can blind us from how much interest consumers will actually have in our vision.
Of course, you can do your research and conduct tests, but so many factors go into building a brand—marketing, business planning, strategic development, talent recruitment—it is impossible to predict how well your business will fare with the public until you are knee-deep in the project. Adjustments will always have to be made along the way, but who’s to say you’ll get it right? Of course, this is not to deter anyone from starting their own business, but rather a chance to offer a realistic perspective from which to evaluate your readiness.
5. Market Risk
If there is one thing we know for sure, it’s that there is no certainty how the market for a certain product or service will change over time. Economic climates can drastically affect sales. For example, when the economy falls, consumers tend to shy away from purchasing nonessential items, or at least fewer of them. On another note, if a competitor sprouts up with a lower price or better value proposition, your bottom line could be directly affected if not irrecoverably damaged. You could be forced to drastically alter your vision to remain profitable.
6. Personal Risk
Entrepreneurship may be “the fullest” full-time job you can have—at least in the first few years. You will likely spend far more hours building your brand and launching your vision than you will working a traditional 9-5 job. The amount of worry and responsibility that accompany being a business owner can start to take a toll on your physical health, your mental health, and even your relationships. Many entrepreneurs will attest to the fact that the reward is worth this risk, but it’s best to be prepared for a very different (and demanding) type of lifestyle.
Taking the Plunge
If you still think entrepreneurship is the right choice for you, then it’s time to roll up your sleeves and get to work. Arguably the most important step will be to make sure you can financially support this venture, which means estimating expenses and measuring those against your personal financial picture. You will face enough risks starting your own business, but with the proper planning, you can take measures to insure against those that are most likely to affect you.
At Harbor West, we are financial advisors that understand the risks that entrepreneurs take. We are entrepreneurs ourselves. We know how rewarding the task can be when the proper steps are taken to insure against risk and prepare for possible bumps in the road. If you are unsure how to get started with this process, call our wealth management office today for a complimentary Discovery Call to learn more about our work with business owners like you.
This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice.
Harbor West is a division of NorthEast Community Bank. Securities and Advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.