How to Manage Risk From a New Business

Understand the risks you will face

Risk comes in many forms, and managing it effectively means looking at your business from every angle.

Financial risks are the obvious ones: running out of cash, taking on too much debt, or underestimating expenses. Because cash flow issues frequently undermine otherwise viable businesses, effective financial management remains one of the highest priorities for new founders.

Operational risks include a wide range of day-to-day challenges, such as losing a key employee, experiencing supply chain disruptions, or dealing with equipment failures. Without proper systems and contingency plans, these issues can escalate quickly.

Market and competitive risks emerge when consumer demand shifts; competitors undercut your pricing, or your product doesn't resonate with the audience you thought it would.

Technology and security risks have become increasingly critical. Data breaches, ransomware, and outdated technology can disrupt operations and damage your reputation.

Legal risks arise when businesses lack a clear understanding of contracts, lease agreements, and regulatory obligations. Common issues include mishandling customer data, failing to meet privacy requirements, overlooking workplace health and safety responsibilities, or operating without the proper licenses and approvals.

Human resource risks often surface as the business begins to grow. These include inadequate staff training, employees lacking problem-solving or leadership skills, poor people management, and industry-wide skill shortages that make it challenging to hire or retain specialized talent.

Five strategies for managing business risk

1. Build Financial Discipline into Your Operations

Cash is the lifeblood of any business. Running out of money is one of the most common reasons startups fail, but it’s also one of the most preventable.

Monitor cash flow closely. Track every dollar coming in and going out. Understand your burn rate and how long your current reserves will last. Digital banking tools and accounting software can provide real-time visibility into your financial health.

Maintain a cash reserve. An emergency fund covering three to six months of operating expenses can help you survive slow periods or unexpected costs without derailing the business.

Manage debt carefully. Before borrowing, have a clear repayment plan and ensure the debt will generate returns that justify its cost.

2. Validate Your Market Before Going All In

Many businesses fail not because of poor execution, but because they’re solving a problem nobody actually has.

Test demand early and often. Use surveys, beta programs, pre-orders, or minimum viable products (MVPs) to gauge interest and gather feedback with minimal investment.

Understand your competition. Identify who else is serving your target market, what they do well, and where gaps exist. Competitive analysis helps you position your offering and spot potential threats before they become serious challenges.

3. Protect Your Business with Comprehensive Insurance

Insurance doesn’t eliminate risk, but it shifts certain risks to insurers better equipped to manage them. The right coverage can protect your business from catastrophic losses.

A business owner’s policy (BOP) typically combines general liability and commercial property coverage, offering essential protection for many small businesses at a reasonable cost.

Professional liability insurance protects service-based businesses from claims related to negligence, errors, or failure to deliver promised results.

Workers’ compensation insurance is required in most states once you have employees and covers medical expenses and lost wages from work-related injuries.

Cyber liability insurance has become increasingly important as businesses rely more heavily on digital systems. It helps cover costs associated with data breaches and ransomware attacks.

Working with an independent insurance broker can help you identify coverage gaps and select policies that match your specific risk profile.

4. Put It in Writing: Contracts and Agreements

Verbal agreements may feel easier, but they leave businesses exposed when disputes arise. Clear, written contracts protect both parties.

Client and vendor agreements should clearly outline deliverables, timelines, pricing, and what happens if obligations aren’t met.

Non-disclosure agreements (NDAs) help protect sensitive information such as trade secrets, customer data, and pricing strategies.

Having an attorney review your standard contracts is a worthwhile investment. The upfront cost is minimal compared to the expense of resolving disputes caused by unclear or poorly written agreements.

5. Prepare for the Worst with Contingency Planning

Preparing for disruptions isn’t pessimistic. It’s how businesses survive the unexpected.

Create a business continuity plan that identifies critical operations and outlines how they will be maintained during disruptions. Include communication protocols, decision-making authority, and recovery priorities.

Back up data regularly and store backups in multiple locations, including secure cloud storage. Test backups periodically to ensure data can be restored when needed.

Plan for different scenarios, such as natural disasters, economic downturns, or the loss of a major customer. Thinking through responses in advance reduces reaction time and limits damage when issues arise.

The bottom line

Starting a business means accepting risk, but it does not mean accepting unnecessary risk. The entrepreneurs who succeed are not necessarily the boldest or most daring.

They are the ones who understand the risks they face, prepare accordingly, and build systems that protect their businesses while still allowing for growth and innovation.

Risk management is about ensuring that when challenges arise, and they inevitably will, you have the resources, strategies, and resilience to overcome them.