Not every company owner is a master at handling finances. It can be a difficult job for a startup or small business owners to manage their cash flow when they work quarterly, instead of a yearly basis. These small business owners usually go for AR financing or apply for a bank loan to counter some of their losses or if they need cash to keep their new business running and growing. They may also aim to invest cash for the setup. Operating a start-up or a small business with certain budget deals with a lot of challenges and the owners have to maintain their cash flow and budgeting accordingly and smartly. If they don’t do it, their business is likely to go in loss before it starts bringing in some profit and revenue. Today we are going to share with you 10 common financing problems that small businesses or startups face.
It can be a nerve-wracking situation for a small business owner to face the problem with numbers not adding up financially. They will be thinking to themselves what went wrong and its respective reason. If a business’s books are not in order and they are not reviewed timely, then a lot of issues are coming down the road. Too many small businesses don’t have a proper and effective way of keeping their books in check and order. If you are not up to the task of maintaining your financial books, it is a good idea to hire a professional to do it for you. These professionals know exactly how to keep an eye on your financial books, as it is their job and they are paid for it.
SPENDING OVER THE LIMITS
Overspending is another problem that small businesses usually go through. Ranging from spending too much money on lunches for a business meeting to something like getting new furniture for the office or buying number-crunching software for office computers, the amount of money that a business should usually keep is spent on things that are not necessary for day to day operations. The first thing to do would be to sit down and allocate what amount of money should be spent for what purpose. You should decide what amount of money needs to be spent on things that are needed for your business to run like a well-lubricated machine. By cutting down the unwanted expenditure of money, you will be able to save a lot of cash and your small business will grow at a faster rate.
INSUFFICIENT WORKING CAPITAL
For any small business, working capital is the fuel that keeps the engine running for a long time. A small business or a start-up must have at least six months of working capital at its disposal to cover costs are expenses, as it will not be seeing much profit in the early stages of the business’s life span. Without the capital, a small business will not have room to breathe and it will become difficult to acquire new clients, develop more or new products, or move to a biggerer location. The most common solution to this problem is cutting business expenses and costs by 20 percent and keeping that money aside and build up some working capital for the coming months. Also, as you will have some cash on the side, you will be able to handle any emergency financial situation that might arise.
MISPRICING OF PRODUCTS
The most common mistake that small businesses usually do is that they misprice their products. They usually add their margin after the cost of production and try to sell it for as much as they want. This can create an issue for the business as the market price of a certain product that it provides may be different when compared to the real market value of such a product. In this way, the company will lose its potential customers and they will prefer choosing their competitor’s similar product. The intelligent thing to do would be to look at a competitor’s pricing of a similar product and price it accordingly so that customers select your services over other available options.
OVERSPENDING ON ADVERTISEMENTS
Many small businesses that run on a tight budget may end up wasting their cash on unnecessary ads. It is a good thing to spend some cash on promotion, as it will help the business expand through marketing. However, splurging the whole budget on too many ads will become counterproductive. Small businesses usually run on a certain daily expenditure for day to day operations and the cash can be saved and spent on other essential things like research for developing new products, stocking up on inventory or even having some cash saved up for an invited financial crisis.
LATE PAYMENTS FROM CUSTOMERS
For businesses that have a line of credit with their customer, they must pay on time. If payments from clients are not received on time, the business misses its payments to their vendors and it eventually dies. The best idea to counter this is by making strict policies and rules to counter this situation. Enforcing late charges and penalties on services is a great way to make clients pay the amount on time.
LACK OF CASH-FLOW MANAGEMENT
Your business may be bringing in a lot of revenue and profit every month, but if you don’t manage the cash properly, it might become a problem for your business. Small businesses usually end up spending cash on worthless things and end up depleting their money, which might have invested something useful. Bad cash flow management practices can easily kill a small business. Keeping a fixed amount of money on the side and cutting unnecessary expenditures can be a remedy to this problem. Hiring a financial advisor is also a great idea, as it is their job to tell you how to manage your cash.
A businesses’ success depends on the quality of employees it has. Having devoted and competent employees usually come with a price. However, It is not a good practice to hire as many employees as you want. According to the famous saying ‘too many cooks can spoil the broth’, so, it is a good idea to hire not more than 3 employees for a certain department of your small business. Having too many employees will result in paying twice as much as you should. Also, it would be ideal if you plan and be realistic about the amount of money you are going to dedicate to the payroll.
Not Getting Paid Up-Front
Not getting payments of procures or services up-front can hinder a small business’s progress to become successful. Usually, customers pay after they have availed of a certain service or bought a product. If the client or customer avails the service and decides not to pay, it can impact your business finances, as many small businesses work on a daily income basis. To avoid this issue, it is a great idea to take payments in advance before offering a service to a client.
TOO MANY SALES PROMOTIONS
Sales promotions are a good idea to boost a business’s sales. However, doing it often will replenish profits. Small businesses usually look at the short term sales and ignore long term profits which will eventually decide whether the business survives or not. A good idea to solve this issue will be to revisit and tweak the financial model to find at what time you should give a sales promotion and for how much money.
Small businesses usually rely on monthly profits and do not have huge financial dealings as large scale businesses have. They have to manage their properly and efficiently to ensure their survival. How can a small business grow if it does not have its finances in order? A lot of hard work goes into managing money, and you must have first-hand knowledge of problems that you will experience shortly. Today we have shared with you some common financial problems of small businesses, so it a good idea to take these points into account for a flourishing system.