Small businesses are prone to various challenges but the ones related to finance can be quite complicated. Knowing exactly how to prepare and deal with the challenges can determine whether your businesses will succeed or fail. What are the common financial challenges your small business is likely to face and how do you solve them?
In this article, you’ll find actionable tips for dealing with financial challenges in a small business.
Unforeseen expenses can be solved by proper budgeting
Unexpected costs of running a small business can vary depending on the industry and the season. They may include:
- Professional fees
- Maintenance and replacement of equipment
- Insurance costs
- Employee training and associated benefits
- Credit card fees
At the same time, some business owners don’t understand fully how the recent change in US tax code affects them.
The challenges of unexpected costs tend to get compounded if a company doesn’t have a budget to deal with the costs. By creating a budget that has enough wiggle room to cater for unforeseen expenses can be critical to the survival of a small business.
It is advisable to lower the expenses related to credit cards, insurance, and professional fees by shopping for cheaper but competent alternatives. In addition, reviewing business expenses on a regular basis can help you identify ways to save on expensive purchases.
Business and personal finances should never mix
It is surprising that most small businesses don’t have a different account dedicated to the business. Yet, challenges related to mixing personal and business finances are quite potent. This is a risky undertaking since it makes it very difficult to keep track of the cash flow.
In most instances, single member LLCs and solopreneours tend to mix their finances. While it’s easy for the business owner to think that a separate bank account is not necessary, this habit can make it impossible to understand how the business is fairing.
Irrespective of the size of the business, having separate business accounts can be quite beneficial. In fact, mingling of funds is one of the top reasons why small businesses face cash flow issues.
Besides, mixing personal and business funds can be a red flag when auditors and prospecting investors are examining the finances. Having a single account for the funds may appear like a convenient fix but it can really lower the business value.
Late payments can be very frustrating
For most small businesses, dealing with delayed payments is the norm. Late payments can be threatening especially when you have to pay the bills and your creditors are not very lenient when payments are due.
Until recently, a 30-day payment term was the standard in most industries but it quickly becoming obsolete. Today, bill mailing and check payments are no match for electronic invoices and online payments. In fact, businesses are getting used to requesting payments within 14 days.
Most businesses have realized that sending an invoice quickly can shorten the time it takes to get paid. When using electronic invoicing, you can have the bill sent as soon as you deliver the service. However, you need to be sure that you are sending the bills to the person responsible for payments.
By using invoicing software, businesses can send automated friendly reminders when due dates approach.
While delayed payments can be a real challenge to business cash flow, you can use tools like invoicing software to make it better.
Lack of enough capital
More often than not, businesses are launching without having enough funds. It’s quite disheartening to stare at business opportunities that you can’t seize due to lack of funds. At times, business owners rely on reinvesting the profits but this process is sluggish.
While there are several sources of funding available, not all of them are appropriate for every business. Before you think of tapping into external sources of capital, it is important to make sure you are crystal clear about your business objectives.
Once you understand what you need, you can explore the available options to figure out which is the right approach.
It is not uncommon to find that your business has a high volume of sales but the profits are ridiculously low. Normally, this shows that you are over spending or there are some hidden expenses that are shrinking the bottom line.
You can regain control of the expenditures by implementing a purchasing policy and well-knit system that makes sure you acquire materials at competitive prices.
Having a strict budget can help you define strict purchasing goals. In addition, always ensure there is close supervision of policies, orders, receiving as well as reporting.
The rate at which small businesses fail is alarming but as an entrepreneur, you have to be optimistic. Understanding the challenges faced by startups, and the reasons behind their failure is a huge step towards success.