The Art of Startup: How to Calculate Risks for Your New Business
There are numerous factors that can be used to calculate the risk that a company is taking when just getting started. Understanding the various factors can help you know if you want to proceed. Here are some factors to keep in mind.
Liquidity
Since 90 percent of all startups fail, it is important to consider the liquidity of a business before beginning. If the company is going to lay out large amounts of cash on equipment and supplies, then consider if those are resellable if the company fails.
Those companies who can resell the vast majority of their equipment at a very reasonable price lower their risk factors.
Key People
One of the reasons that many companies fail is that the key people do not have the expertise needed to make key decisions.
They may also not have the capital needed to hire people who do not have the skills needed to offset those of the founder. Companies like CreditRiskMonitor consider this one of the top factors when they decide how likely a corporation is to declare bankruptcy.
Profitability
The profit margin is extremely low in some markets. This ratio is found by dividing the operating income by the revenue and multiplying by 100. Ideally, the profit margin should be between 10 and 15 percent.
Yet, almost 90 percent of businesses with gross sales of more than $700,000 have a profit margin of less than 10 percent. When this margin gets too tiny, then it can adversely affect the company’s ability to secure new contracts and equipment.
Therefore, if you are starting a business, then take a look at how much profit you can expect from each sale.
Spending
Know how much money your business is bringing in is one thing, but you should also know how much you are spending as well.
The reason for this is, just because your business is bringing in money doesn’t mean you aren’t spending it faster than you are making it.
Keep in mind, spending isn’t a bad thing as it can help you grow your startup in the long run.
The question should be “are you spending and investing in the right areas of your company?” Depending on where you are spending your money can be risky, but if it is a risk that will likely pay dividends
then it may be a risk worth taking. You just have to make sure that your startup is financially stable enough to take those kind of risks. You will also need to keep in mind the concept, you win some and you lose some.
Valuation
Many different factors go into determining the value of a business. The first factor is often your company’s ability to turn a profit, but other factors are also involved like your ability to market your business in a cost-effective method.
Another key is how long your business has existed compared to the average age of your competitors. Each niche market also has a general value.
Efficiency
As a new business gains employees, then those employees must be able to generate additional income for the business.
In fact, the more employees a company has the higher the ratio of income each employee should be able to generate for the business because the cost of taking care of those employee’s basic needs usually becomes higher.
Considering these five factors will help you calculate the risks of your new company. It is possible to be in the 10 percent of new businesses that succeed by keeping each of these key components firmly in mind. Make no mistake about it, however, it also takes grit and determination.
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Category: Business
