Knowing your financials is vital for success in 2021. Last year resulted in many businesses being unsure about their long term profitability and highlighted cashflow issues.
To be successful in 2021, businesses need to understand and manage their finances.
Consider the following;
1. Know your tolerance for financial risk
“More than 97,966 businesses were caught off guard in 2020, causing them to close their doors permanently.” – Yelp Economic Report
Adequate risk management is an essential aspect of running a successful business. Try to anticipate possible risks, assess the potential impact on the business, and be prepared with a plan to react to adverse events.
2. Divide your risk management strategies into more specific categories.
These include; market risk, credit risk, liquidity risk, and operational risk.
a. Market Risk
Market risk relates to the changing condition of the market place. For example, COVID 19. The businesses that could assess the risk of closing their brick and mortar stores and invest in online marketplaces thrived. Your market risk can also include your competition. Is there a risk they could outsell you? Or out innovate you? Are you prepared for this? What are your USP’s, can they be beaten?
b. Credit Risk
Credit risk is the risk businesses incur by extending credit to customers and/or suppliers. Do you have sufficient cash flow to cover your credit risk? Can you remove credit to customers and suppliers if necessary?
c. Liquidity Risk
How easily can you convert your assets into cash if need be? This is your liquidity risk.
General or seasonal downturns in revenue can present a substantial risk if the company suddenly finds itself without enough cash on hand to pay the basic overheads necessary to continue functioning as a business.
d. Operational Risk
What monetary risks can arise from your businesses daily activities? Are the any legal fees you may need to cover? Recent flooding in NSW has caused operational risks in the day to day running of businesses. Another example, many companies faced fraud or cyber-attacks during 2020 as many employees moved to work from home situations with little or non-existent cyber security.
3. Build a budget
Plan a tentative budget with your accountant in 2021. By consistently updating your budgets, which flow through to your cashflow statements, balance sheet and profit and loss statement, you should always be up to date with your businesses financials. Creating a budget and risk management strategy will not only prepare you for any unexpected events in 2021, but help excel your business in 2021.