Leadership

Understanding Risk: What Business Owners Need to Know

Roughly half of all businesses survive for five years and only one-third of businesses stick around for ten years or more, according to the Small Business Bureau's Office of Advocacy. Meanwhile, Gallup research found that the success of a new business has a lot to do with the person who started it.

You need more than just a great product and sales team. You also need to understand your business risks and how to offset financial struggle. Take a look at some of the common factors of business risk and what you need to know.

Unit price

Figuring out your unit price isn't as simple as comparing it to what your competitors are doing and hoping for the best. A true unit price is calculated from the variable costs and fixed costs incurred by a production process. From there, it's divided by the number of units that are actually produced.

There’s a bit of a science behind getting your unit price right to increase your profits. Figuring out your unit price is crucial to setting guidelines on the volume you want to produce. As your production increases, your fixed costs are evenly distributed across those units and your profit can increase.

Sales volume

Setting a strategic price point for your sales isn’t enough without the right volume behind it. At the minimum, a break-even sales volume is needed just to cover the total cost of production. But a break-even sales volume won't cover fixed business costs or variable costs to run your company. Raising prices even by a small percentage, creating upsells to your product and investing in marketing are all ways to quickly increase profit with a focus on sales volume.

Business owners and employees need more education on how to determine a sales forecast and plan accordingly. Look into open enrollment courses with a company like Moody's Analytics to receive training on everything from corporate cash flow analysis to calculating business risks.

Input costs

Your input costs are the cost of direct material, direct labor and other overhead items that all relate to the production of your product. Companies can take a hit when these costs inflate over time and your prices flatline. The key is to stay ahead of inflation and rising prices by increasing your sales volume and trying to buy in bulk.

Work to lower your input costs while simultaneously raising your prices. Starbucks made the news when it widened its margins by raising their prices despite lowering their input costs.

Competition

It’s easy to think you can stay ahead of your competition by offering a quality product at an affordable price. But what if your competition is a major retailer with access to bulk, global discounts like Walmart? Instead, assess your competition and see how you can beat them at their own game.

Offer a bundled package, focus on results instead of discount pricing and add value to your product that your competition isn’t doing. For example, a business training center can also offer subscription services and free monthly coaching calls while their competitors keep selling courses.

Government regulations

Government regulations can create uncertainties and prevent businesses from growing. For example, healthcare regulations can make it difficult for companies to scale and hire enough employees to keep their business running.

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