Starting a Business

The 5 Biggest Financial Threats to Your Small Business

Jayson DeMers | February 6, 2015
Stressed business owner

Running a business is about balance. You have to balance your weaknesses with greater strengths. You have to balance your team with talented candidates in many different disciplines. You have to balance threats with opportunities, or at least proactive measures to reduce those threats.

Threats to your business can come in many forms, from conceptual failures to real physical consequences. Some of the most dangerous threats are financial threats, which can escalate your costs, stifle your revenue growth, or in some other way compromise your profitability.

As you grow and develop your business, be sure to avoid these five major financial threats.

1. Losing a Major Client

Once you get your business up and running, you’ll probably have a handful of major clients or a major segment of your audience that you rely on for the majority of your revenue. The Pareto principle applies here for most businesses—approximately 80% of your business (or revenue) will come from 20% of your customers. Losing the bulk of that 20% of your customer base could be devastating for your revenue, leaving you with all the expenses of your original model without the income to offset them. Depending on the size of your business and the contingencies you have in place, it could spell disaster for your company in a matter of months.

The solution: The easiest way to prevent such a potential disaster is to strategically build your customer base. If you have one major client that provides the bulk of your revenue, try to find another that can balance them out, or build a backup of several dozen smaller clients so you aren’t as dependent. Similarly, you can expand your target demographics so you aren’t dependent on sales from one niche market. Either way, make sure you have formally drawn-up contingency plans that allow you to either drastically cut expenses or change strategies should your revenue suddenly diminish.

2. Overspending

It’s easy to overspend, especially when you’re excited about developing your business, but spending too much too quickly could wind up devastating your bottom line. The two main culprits here are marketing and hiring. On the marketing front, companies tend to overestimate the impact of their marketing campaign without grounding the numbers in research. As a result, they’ll throw thousands of dollars into a campaign they know nothing about, and might be forced to leave before they see any real results. On the hiring front, companies might hire a full team of full-time workers, anticipating increased demand, only to find their revenue growing far more slowly than expected.

The solution: There are two solutions to this financial threat. The first is doing more extensive research. Force yourself to logically and statistically defend your spending decisions with real research—it can prevent you from making impulsive or speculative decisions. The second is scaling more efficiently. In hiring, marketing, or any other spending area, start out small and start out slowly. Monitor your progress and only ratchet up your spending as necessary.

3. Poor Cash Flow Management

Cash flow is another business killer. In addition to making sure the bottom line for the business shows a profit, companies need to actively manage their incoming and outgoing cash so they can continue to pay their bills and their employees without jeopardizing the entire operation. Neglecting to actively manage your cash flow could lead you to run out of money—even if your total projected numbers still land in your favor.

The solution: Keep a close eye on your cash flow, and do whatever it takes to keep it positive. Negotiate terms with your vendors and suppliers, and only pay bills on the day they’re due. Give limited terms to your customers, invoice early, and send follow-ups to ensure timely payment. Report regularly, and know where you stand at the end of every day. Most cash flow problems can be corrected if caught early.

4. Pricing Errors 

Pricing problems are some of the most difficult financial threats to prevent, since there are so many unknowns when developing an initial price model. In your business plan, you likely outline the reasoning for the prices of your products and services, estimating the total resource and human capital costs for production and distribution. However, there are many unpredictable factors that could get in the way of successful implementation of your model. Pricing too high could severely throttle your customer base, while pricing too low could make your profit margins too slim to see any real eventual benefit.

The solution: There will always be unknowns and market changes, so it’s impossible to effectively predict every aspect of your pricing structure. However, if you extensively research your pricing and stay flexible enough to adapt when new factors emerge, you’ll be able to build an ever-changing pricing model that puts you in the best possible ongoing position.

5. Legal Problems

It could be a disgruntled employee trying to take you for all you’re worth. It could be a harassment or discrimination suit filed against you by an employee. It could be a copyright or patent violation. It could be an angry customer trying to get revenge. Whatever the case, there’s a very real possibility that your business will face some type of legal action at some point during the course of its development. Getting sued could cost you thousands or millions of dollars, which you might not have, forcing you to close your doors forever.

The solution: Being proactive is the key here. Offering training seminars to prevent your employees from engaging in actionable offenses is a good idea, but you’ll never be able to prevent every possible lawsuit. If you’re interested in protecting your business from these threats, general liability insurance will help provide an additional layer of support.

Threats are only powerful if they aren’t anticipated. Keeping a steady read on the pulse of your business, identifying potential problems before they escalate, and constantly refining your approach will all help you mitigate the possible impact of these critical threats.

Must Read

Now, who's ready to get their insurance problems solved?