Save your startup: Risk management 101

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Risks are an inevitable and integral part of entrepreneurship. While they cannot always be eliminated, it is important to learn how to manage risks to protect and enhance the growth of your business.

Building a startup can be intimidating, but it doesn’t have to be. A startup should have systems in place to identify and remedy vulnerabilities and threats to the business, employees and clients.

Risk management is a practice of identifying potential risks in advance, analysing them and taking precautionary steps to reduce or curtail them. Ranking or prioritising the risk, monitoring and reviewing the steps are also significant steps in risk management.

There are some simple steps that a leader or a team can follow to anticipate and mitigate risks.

Knowledge
Knowledge is your biggest and best resource. Many people start new businesses on a harebrained idea. What’s important is researching the market you are entering for the possible risks that you may have to face in the future.

You need to know the length, breadth and every inch of your market. Who is your target audience? Is there a demand for your product or service and are people willing to spend money on it?

Research your competitors. Figure out what is working, where the gaps are and how you can develop your competitive advantage.

Research your product. Understand where your product or service stands in the industry. You may not find your USP right off the bat but don’t let that deter you from your ambitions. Understand what margins you are operating at, what your break-even point is and how much work capital you require.

Research trends in your market, both past and current. For your startup to succeed, you need to continually invest time catching up on market news, learning and eliminating any grey areas you might have with regards to your market research.

Finance and data analytics
When some people come to me for business advice and want to begin their entrepreneurship journey, they tell me how terrible they are at numbers and the usual ‘I am not a finance person.’ If you are not able to crunch key numbers and data, your business won’t survive the test of time.

You don’t need to have a background in finance to be able to understand your balance sheet, which, in essence, is your company report card. This can be explained by consultants or can be learned by reading. In the book Romancing the Balance Sheet, author Anil Lamba provides an actionable guide to maintaining an impeccable balance sheet. It is imperative for an entrepreneur to understand his/her balance sheet and use the data in decision making.

Most entrepreneurs track their Profit and Loss (P/L) statements to see their margins and profitability, and often only focus on P/L numbers. While it’s important to maintain an accurate P/L statement, it is equally important to see how the P/L affects the Cash Flow statement and Balance Sheet.

Cash Flow statements tell you about the capital you need to fund your venture. Knowing your cash flow allows you to make contingency plans and allocate capital to areas of the business that need it most.

Data analytics is another indispensable part of risk management. Your startup should have a robust Management Information System (MIS) in place. It is a great tool to track your operational efficiency, incomes from different departments, how your human resources are placed, your overhead costs and more.

It’s okay to not have it all figured out on Day One. You can build the system over time. Most entrepreneurs are able to have a good grip on the risk in their business due to a strong MIS.

People Management
Any business requires collaboration. As founders, you need to spend time hiring the right talent. You need to motivate these people over time and invest in training and mentoring them.

Everyone should be dispensable in your startup, including the founder (makes your company an acquisition target if this is the case). Provide an opportunity for growth to people under you and invest in mentoring and motivating them.

In the beginning, you may have 10-12 people who are indispensable to the company. Work on making them dispensable, while providing them with job security and progression. If any of those people go on a holiday or an extended leave, the business shouldn’t suffer.

Draw a detailed organisation chart. Note all the important positions and observe who is the person without whom the department would fail. If they are not available anymore, how will it affect your company? Do you have a contingency in place for this position?

Be diligent about tracking your systems. Be open to feedback about the actions you take and how effective they are. This may seem like too much of a stretch but don’t let it bog you down. This trial and error is important for the health of your startup.

Successful entrepreneurs learn to accept unavoidable risks and assuage the risks that can be managed. Good risk management needs a good core team, a business-friendly environment, faultless research and wise financial management.

The author is a Founder and Managing Director of SILA.

The thoughts and opinions shared here are of the author.