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Balancing Risk and Savings: A Guide for Small Businesses

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Discover the key factors to consider when balancing risk and savings for your small business.

What is the right balance between investing in your business to grow and saving? The last few years have had large swings in government cash and low interest rates, making investing in your business a much easier decision. More recently, I have seen a shift to higher inflation and interest rates and less available cash. What should we do when profitability decreases yet we need higher revenue and cash? Do we invest more, or do we save more? 

I love working with small businesses and the versatility to be flexible, try new ideas, and make adjustments. I also know small businesses usually cannot weather a recession or unexpected client/employee loss as much as larger organizations. What do they do? I want to provide some thoughts as I work through these challenges with my business and with my clients.

Importance of Savings for Small Businesses

Savings play a crucial role in the success and stability of small businesses. Building up savings gives businesses a financial cushion during uncertain times or unexpected expenses, providing a safety net to help them weather economic downturns, market fluctuations, or unforeseen emergencies. Morgan Housel, in his book The Psychology of Money, illustrates through engaging stories how effective financial management can lead to increased security and flexibility, which are essential for small businesses.

Additionally, having savings enables small businesses to seize growth opportunities and expand when the time is right. It provides the necessary capital to invest in new equipment, hire additional staff, or launch marketing campaigns. With a solid financial foundation, businesses can confidently pursue their goals and take calculated risks.

Furthermore, savings can help small businesses establish credibility and access financing options. Lenders and investors are more likely to support businesses that demonstrate financial responsibility and maintain solid financial positions. Demonstrating the ability to manage finances effectively and repay debts can significantly enhance a business's reputation and its potential for growth.

In summary, savings are essential for small businesses as they provide stability, flexibility, and credibility. They offer a sense of security and open doors to various opportunities for growth and success.

Strategies for Balancing Risk and Savings

Finding the right balance between risk and savings is crucial for small businesses. It requires careful planning and consideration of various factors. Here are some strategies to help achieve this balance:

1. Assess your risk tolerance: Understand your comfort level with taking risks and determine how much risk your business can afford. This will guide your decision-making process when allocating funds for savings and business investments.

2. Set financial goals with a budget and adjust your forecast regularly: Define your short-term and long-term financial goals. Knowing your goals will help you prioritize your savings and investment strategies. Consider factors such as business growth, expansion plans, and anticipated expenses. Develop a comprehensive budget that accounts for all your business expenses with enough cash flow margin for savings. The key is assessing and adjusting regularly.

For a deeper dive into shaping these forecasts and adjusting your business strategy, consider exploring my book, Forecast Your Future: How Small Businesses Exchange Stress And Chaos for Cash And Clarity. It provides practical insights and templates to manage your financial planning effectively.

3. Establish an Emergency Fund: It's critical to build an emergency fund to safeguard against unexpected expenses or financial downturns. Aim to reserve at least three to six months’ worth of operating expenses. I understand this may seem daunting for some businesses, but setting a concrete goal and gradually working towards it can make it achievable. 

The agility of small businesses is their strength; they can swiftly adjust aspects like customer base, pricing strategies, expenses, personnel, and overall tactics. To effectively manage and track your progress, consider setting up a dashboard. This tool helps you visually monitor where you stand and focus on your financial targets.

By implementing these strategies, small businesses can balance risk and savings, ensuring financial stability while pursuing growth and opportunities.

Investment Opportunities for Small Businesses

While savings are significant, small businesses should also consider investment opportunities to maximize their growth potential. Here are some investment options worth exploring:

1. Research and development: Allocate funds for research and development to innovate and improve your products or services. Investing in research and development can give your business a competitive edge and open doors for new revenue streams. The good news is that there are R&D Tax credits available to help.

2. Marketing and Sales: Investing in marketing and sales initiatives is crucial for increasing brand awareness, attracting new customers, and securing new deals. Recently, one of my clients faced a dilemma about hiring a salesperson during a period of slow sales. This hire represented an initial investment and immediate cash outflow. Together, we analyzed the breakeven point to determine the viability of this investment. Despite the inherent risks, the decision to proceed was supported by the availability of funds, reducing the financial risk. Investing in sales personnel is always a gamble, but with careful planning and sufficient resources, it can be a calculated one that potentially pays off substantially.

3. Technology upgrades: Stay current with the latest technology trends by investing in equipment upgrades or software solutions. This can enhance productivity, streamline processes, and improve customer experience. There seem to be an unlimited number of software subscriptions, and they all seem to do AI now. If you do assess, remember to turn it off if you aren't using it and consider the ROI. Is the software automating, saving time, or increasing revenue in any way?

4. Staff Training and Development: Investing in the professional development of your employees is crucial. By offering training programs and workshops, you can equip your staff with new skills and knowledge that not only drive innovation but also significantly improve business performance. For instance, we recently held a webinar titled "Innovative Compensation," demonstrating that quality training not only boosts employee retention and engagement but also positively impacts the bottom line by opening up new revenue opportunities.

Though it represents a commitment to long-term growth rather than immediate gains, the investment in employee development consistently proves its value. Additionally, I collaborate with a client, Learn-It, that specializes in providing such transformative educational services to companies, underscoring the effectiveness of this approach.

5. Expansion and diversification: Explore opportunities to expand your business into new markets or diversify your product or service offerings. This may involve opening new locations, entering partnerships, or exploring new target demographics.

It's important to evaluate investment opportunities and their potential returns and risks carefully. Consider consulting with a financial consultant, such as a fractional CFO, to make informed investment decisions that align with your business goals and risk tolerance.

Keep Innovating Responsibly

In conclusion, we must keep innovating, prospecting, learning, and setting aside funds. All of this has to happen in conjunction with each other. There is a healthy balance between risk (investment) and savings, which we must figure out for ourselves. As Morgan Housel discusses in The Psychology of Money, understanding our desire for freedom with time and resources is crucial. Also, what is rational and reasonable may be in conflict. It may be rational to invest and borrow because the normal return should pay off, but it may not be reasonable for your risk tolerance and peace of mind.

Also, as a Christian, I can't say enough about praying to God for all business decisions. God gives believers wisdom if we ask, as it says in James 1:5. Who wouldn't want wisdom from the Creator of the Universe? Let's keep assessing, adjusting, and investing reasonably so small businesses weather the future economic storms. Small businesses' survival, growth, and innovation are essential for jobs and our economy.

Ready to Take Control of Your Business's Financial Future?

Navigating the complexities of financial planning and risk management can be challenging, but you don't have to do it alone. Bender CFO Services is here to guide you through every step. From establishing robust emergency funds to optimizing your marketing investments, our expertise can help transform your business's financial health.

Contact us today to learn how we can tailor our services to meet your unique needs and help you secure a prosperous future for your business. Let's build something great together.