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8 Steps Every Entrepreneur Can Take to Reduce Risks

written by: W. A. Swan•edited by: Jean Scheid•updated: 5/31/2010

What are the risks of an entrepreneur and what should an entrepreneur do to reduce risk? While these seem like large questions, they are vital to both personal and business considerations. If this questions has your head spinning, find 8 tips here to reduce risk.

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    Defining the Risks

    Risk Wikimedia Commons What are the risks of an entrepreneur? While there may seem like many, there are top eight things you can do including:

    • Document everything
    • Know the regulations
    • Have insurance
    • Keep your personal life out of your business operations
    • Keep access to critical business operations to yourself
    • Minimize cash handling
    • Incorporate
    • Be active in the daily operations

    Below, we'll discuss each one in detail to help you understand what are the risks of an entrepreneur?

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    Take Control of Your Risks: 8 Tips

    Risk Dice Example Wikimedia Commons 1. Keep Everything Documented

    The single most important answer I would give to the question what are the risks of an entrepreneur is to document everything. What I mean by this is, keep records of all purchases, agreements, contracts, sales, and contacts. This means that even if you pay cash for a little item like a pen, get a receipt. If you make a verbal agreement, make notes. If you agree to purchase an item, get all the details in writing. If you accept work for hire, get the details in writing and have it signed by all parties involved. The reasoning behind this is that it creates a paper trail. The paper trail creates proof that certain acts occurred or were agreed upon. This reduces liability in case something goes wrong later.

    2. Know the Regulations

    This is the next most important way to reduce your risk and liability. If you are aware of the regulations and laws which govern your business, and abide by them, you will always have the law on your side when you are accused of illegal acts, you know your standing and can provide proof accordingly.

    3. Have the Required Insurance

    While not listed as the top method, another item I would tell someone if asked what are the risks of an entrepreneur, is to have the proper insurance for your business. Business insurance, no matter what type, is meant to protect your business from complete loss and keep it in some form of operation. Insurance is especially useful in liability and “at fault" incidents when a customer seeks damages against your business for a perceived action or inaction.

    4. Keep Personal and Business Records Separate

    One of the easiest ways to reduce business risk for an entrepreneur is to keep your personal life out of the business; the reverse is also true. If any part of your personal life is tied into the business, other than you working in the business, your personal finances and property can easily become part of the business liability and suffer the same risk of loss that the business would have. What this means is that you keep separate physical records of finances, accounts, budgets, files, and tax filing for yourself and your business.

    5. Allow Minimal Access to Business Operations

    This is one of the harder methods to reduce risk and liability, but also among the more important. What this means is that there are certain things which only the owner should have access to; which includes financial records and the ability to start or stop purchases and projects. The reason for this is because if something goes wrong with a job, or a purchase is made or stopped, the owner is the person who will be held responsible since they are supposed to have the final say on all decisions.

    6. Maintain Minimal Cash Handling Procedures

    What should an entrepreneur do to reduce their business to risk and liability as far as cash management? Have as few people handling the finances and cash receipts as possible. Retail businesses have the hardest time with this. The best method to handle this is proper accounting and accountability. Have the day's receipts handled by only one person and have any person who handles transactions be fully aware and accountable for any errors. Having employees sign into registers or match managements accounting of the days receipts with their own is the best way to do this.

    7. Incorporate

    When someone asks me what should an entrepreneur do to reduce their business risk and liability, one answer I always tell them is to incorporate as quickly as possible. While a small sole proprietorship may be right to start out with, this is the only type of ownership which can completely destroy personal resources along with the business. If you intend to stay small or don't have use for large corporate structure, use the Limited Liability Corporation (LLC) form to limit your losses should the business suffer losses due to liability.

    8. Maintain an Active and Proactive Presence in the Business

    And while listed last, this item is something you should be doing anyway. If you maintain an active role in your business, you will constantly be aware of potential problems. This will allow you to take a proactive approach and avoid unforeseen risks or potential liabilities.

    By following these 8 tips, you'll have the answer to what are the risks of an entrepreneur.