6 Common Financial Challenges Small Businesses Face
Keeping your small business going is already a challenge in itself. That’s why many people say that entrepreneurship isn’t for the faint of heart. Small business owners encounter all kinds of hurdles on a daily basis, so they need to be tough enough to take on anything. Some of the difficulties they deal with involve managing their staff, staying on top of competitors, maintaining product relevance, and, of course, keeping their finances in check.
Financial challenges affect business owners the most. If you can’t resolve your financial issues, you’ll have a hard time staying afloat, and your business will be at risk of shutting down. Thus, every small business owner must know the potential financial challenges they might encounter in the future. That way, they can prepare themselves, find ways to avoid financial stress when running a business, and create an effective plan in case they’re faced with a financial crisis.
Here are six common financial challenges that small business owners like you should know about and pay attention to:
1. Deficient Working Capital
Whether you have a big or small business, your working capital is your enterprise’s lifeblood. Working capital refers to the money you can use for any of your business’ short-term expenses such as daily operating costs, inventory, and payments for short-term debts. With it, you can ensure that your business will run smoothly and accomplish its financial goals for the following year.
As a responsible business owner, you’ll need a working capital that can cover at least five to six months of your expenses. Without this money, you won’t have the capacity to get more customers and produce products or deliver services. If your working capital has been depleted, it’s recommended that you cut your expenses by at least 20%. This percentage should be set aside every month until you can build up your working capital again.
2. Wrong Pricing Of Products
It’s common for some small business owners, especially those with startups, to try and overprice their products and services for faster profit. However, this strategy isn’t guaranteed to work every time as your pricing may be far different from the actual market value of the product or service. As a result, you’ll only put off potential customers and even your current customers if they find out that they can find a better deal somewhere else.
Thus, it’s vital for you to consider how your competitors are pricing their products and services that are similar to yours. Are you looking to offer a mass-market, low-cost product, or do you wish to tap into a high-end niche? Whatever your choice may be, set reasonable prices to keep customers coming.
3. Posting Too Many Sales Promotions
It’s normal for small businesses to have a specific budget for sales, marketing, and promotions. Especially if the small business has just started, the owner will need to spend some of their budget to spread the word about their business, attract potential customers, and boost sales. However, doing so too often may be disadvantageous.
Unnecessary expenses for promotions and marketing can eat into your profits without you noticing it. Some business owners spend more of their earnings toward promotions because they fail to see the long-term implications of such action, which can threaten the survival of their business. Thus, if you’ve noticed that your sales are decreasing or have shown no improvement even with your large budget for promotions, it may be time to step back and put everything into perspective first.
Check which of your modes of advertising provides a significant return on investment (ROI) and which ones don’t. Stop the promotions that haven’t contributed to your sales, and find another appropriate solution such as social media marketing.
Another common financial challenge for small businesses is budgeting, which is the key to smooth and efficient business operations. When you set a budget, you can monitor your expenses and make immediate cuts when necessary.
However, if you’ve created a good budgeting plan yet you fail to stick to it, it won’t work in the long run. You might end up hoping every single day that you’ll have just enough money in the bank to pay your bills every month. A simple mistake in your budgeting can lead to major debts and more complicated financial responsibilities sooner or later.
To be able to follow your budget, see to it that your plan is realistic. If you’ve never done this before or you’re overwhelmed, you can search for budget templates online that will make it easier for you to get on the right track.
List down all of your business’ sources of income such as your sales, investment earnings, and other accounts receivables. Then take note of your fixed expenses such as loan payments and rental fees or leases. After creating your quarterly and annual budgets, schedule your budget reviews so you can ensure that you’re still operating within your budget.
5. Delayed Payment Of Bills
In the same way that you require customers to pay on time, you should also see to it that you pay your bills on time. If your bill payments are constantly late or delayed, it’s advisable to make some changes to your payment terms or resolve your cash flow problems. It would also be ideal to look for clients with better payment terms so you can pay off your bills more promptly.
6. Monthly Expenses
Monthly expenses are normal and expected. However, many entrepreneurs forget to consider the many hidden costs of operating a business. Some of these are insurance premiums, employee wages and bonuses licenses, equipment maintenance, and utility bills.
The best way you can manage your monthly expenses is to determine how much it would cost you to run your business for a month. You can ask your suppliers and vendors to give you discounts as well. Also, don’t hesitate to get in touch with other small business owners and find out how they handle hidden and other startup costs.
The Bottom Line
Financial challenges are bound to come up for all businesses regardless of their size. However, small business owners who are still at the starting phase and trying to get their brand out there may find those issues more complex to deal with. By keeping these challenges in mind, you’ll know what to expect by the time you become part of the world of business, allowing you to plan your every decision carefully.