Running a small business isn’t easy. There are a lot of challenges to deal with, particularly financial ones, and owners need to figure out reasonable ways of handling these challenges so that they can keep their businesses going and not accrue huge amounts of debt.
Although some of the obstacles that small business owners encounter might seem overwhelming, they don’t have to be. If you take the time to calculate and manage various aspects of your business carefully, you should be able to maintain control of your finances.
This article will explore several of the main financial challenges that small business owners face and provide solutions for how to deal with them.
Maintaining Adequate Cash Flow
Managing cash flow is, as one would expect, one of the main challenges that business owners face. Even when your business is fully established, it can be a challenge to keep the amount of cash coming in on par with (or, preferably above) what is going out. Managing this effectively is crucial to keeping your business going smoothly. If not, you might suddenly find that you don’t have enough money to cover basic expenses and could face potential bankruptcy.
Experts recommend the following methods for maintaining adequate cash flow:
- Keep very close track of your expenses, and make cash flow statements on a weekly basis. You should include your total sales, as well as purchases made, and both the amount that is owed to you, as well as what you yourself owe. Keeping track of inventory is also an important component.
- Calculate your free cash flow. This is the amount of money that you have earned minus your monthly expenses.
- Limit the number of customers that you give credit to, or adjust the terms of the credit. By requiring that payment be made more quickly, your cash flow will automatically increase.
- Look into the option of getting cash flow financing. This refers to cash advances that you can receive from lenders when revenue is received. It can help you cover short-term expenses when you really need assistance.
Dealing With Insufficient Capital
A related issue that many small businesses have is a lack of working capital. Working capital involves a number of different components. This includes essential things like employee wages and operational expenses, and also reserve capital, and things like variable capital, which can fluctuate according to changing circumstances.
Effectively managing working capital is an essential component of small business growth because it provides a picture of where the company stands overall and helps to lay the foundation for future growth.
There are a number of methods that experts recommend to manage working capital. These include the following:
- Pay close attention to KPIs and adjust them when necessary.
- Keep close track of necessary debts and vendor payments, and be sure to make these payments on time. Failure to do so can lead to a vicious cycle of debt accumulation.
- Switch to electronic forms of payables and receivables, if you don’t already use these methods. Using electronic forms helps to reduce human error and enable more accurate monitoring of these critical aspects of your business.
- Consider the option of getting a small business loan if necessary. The money could be useful in covering essential payments when you are short on funds.
Debt Accumulation
It can be very easy for small businesses to accumulate excessive debt. Because of the need to finance different aspects of a business, owners often think that the only way to keep afloat is to use credit. This can be very dangerous for the business as Interest can easily start to snowball.
One of the main principles of maintaining good cash flow is taking care of debts. If a business has to spend its potential revenue paying off debts, it will be unable to take care of other necessary costs, much less focus on long-term growth.
The following tactics will help you better manage your debts:
- Take a careful look at your larger budget and think if there are any expenses that you can eliminate. Perhaps you added some extras that you don’t really need, and a more practical use of the money would be to pay off your debts first. Selling equipment that you don’t use can also be a way to reallocate your money.
- Consider the use of runway extenders. These are methods of extending the amount of time you have before you run out of cash. Methods can include staying connected to customers and giving them incentives to make payments more quickly. You can also ask for discounts from your suppliers, look for additional financing options, etc.
- Look into getting a business debt consolidation loan. This will help you bring your business loans together into one payment and get rid of different debts that might be nagging you. You will then only have to worry about managing one loan and might be able to lower your interest rate.
Poor Record Keeping
Another common mistake that small businesses make is to neglect certain aspects of recording their transactions. Many small business owners think that because they do not own a big corporation, they do not need sophisticated accounting software and can rely on manual calculations to manage their finances.
Not paying close attention to record-keeping can lead to a variety of problems. Not only will you have problems with your finances, but you can run the risk of misreporting on your tax forms. This could cause you many different issues in the long run.
To avoid getting into this kind of situation, take the following steps:
- Be diligent about recording all of your financial transactions, no matter how small. Employ a bookkeeper to maintain records for you.
- Keep an eye out for record retention mandates. Both the IRS and the Department of Labor have mandates on how long records need to be retained. You should research these mandates carefully and make sure you are in compliance with them.
- Look into getting an enterprise resource planning (ERP) system, which will provide you with automated financial statements. With the right system, you can get real-time financial analysis and modelling that will not only help you maintain compliance with tax authorities but also help you in your future planning.
Use The Right Tools And Maintain Financial Stability
As mentioned above, running a small business is a challenge on many fronts. Finance-related concerns can seem overwhelming, but they don’t have to be. If you pay attention to your cash flow, learn how to manage your debts, maintain working capital, and keep close track of your records, you should maintain a realistic picture of your business’ finances. Then you can focus on what you really want, which is your business growth.