Protect Your Small Business from Cash Risks

Losing a key employee or a top customer can hobble a small business. Learn how to insulate your company from these types of risks.
August 02, 2012

The very nature of business ownership demands a certain amount of intrepid risk-taking. But not all risks are worth it. Here’s how to minimize unnecessary cash risks in your business and help reduce the exposure when your risk-taking backfires.

Targeted Insurance Coverage

Insurance is the first thing that comes to mind when we think about controlling risk, but there are different ways to target our insurance dollars to get the smartest coverage.

  • Insure against specific threats. Beyond standard business insurance, owners should understand what specific threats they need to insure against. What are your business’ particular points of vulnerability? Is it product theft, loss of heating or refrigeration, a transportation strike, sudden changes in weather, online hacking? By understanding the multiple points of susceptibility in your product or service’s lifecycle, you can begin to direct insurance dollars to cover worst-case scenarios and protect your cash.
  • Insure key staff. Certain employees in nearly every business hold mission-critical roles and couldn’t be readily replaced if they became unable to work. Maybe you have a software developer who’s been with you since the beginning and is close to completing a major system upgrade. Maybe there’s a star sales manager who’s responsible for 65 percent of revenues each month. If you don’t already insure these key staff members, consider it. If you already have key-personnel insurance, review your policies quarterly to make sure they’re up-to-date.
  • Update your insurance as your business evolves. Your insurance coverage should be as dynamic as your business. Review your policies each year with a trusted broker to determine if new policies are necessary or if old ones can be retired. Significant business events like launching new products, hiring new senior staff, entering foreign markets or signing partnerships are all good cues that it’s time for an insurance review.

Maintain Cash Reserves

Properly managing cash flow is another important factor to consider when planning your risk mitigation strategies. Many companies have healthy cash flow, but hold very little cash in reserve in case of emergency.

Consider how your company would react financially to the loss of your largest customer or from the arrival of a new competitor that undercut your prices by 25 percent. How long would it take you to react and what resources would you have on-hand to keep the doors open?

Most business management consultants suggest keeping at least six months worth of operating costs at-the-ready for just such contingencies. Though your business might need to contract to survive, and some of your operating costs could be reduced, having cash on hand is its own form of insurance.

Use an LLC

Venturing into new markets, creating partnerships or expanding your business in different states are all reasons to consider establishing a new legal entity. Containing the risk of a new venture by dividing and insulating the rest of your business is smart strategy—it can shield you from lawsuits, help mitigate the damage from bad partnerships, protect cash, patents and other assets. The typical cost for setting up an LLC is only about $500 in most states (though it may add to the complexity and cost of your business’ tax return each year).

Understanding where our business’ cash and capital risks lie and preparing for them is half the battle. It’s easy to get lost in the day-to-day operations and lose sight of larger threats as our businesses evolve and expand. If it’s true that every opportunity has a corresponding risk, then making the most of one means working hard to minimize the other.

Kentin Waits is a freelance writer and marketing specialist based in Portland, Oregon. His work has been featured in US Airways magazine and top-rated blogs such as Wise Bread, the Consumerist, and MSN SmartMoney. When he's not writing, Kentin runs a small online antiques business.