Top 5 Financial Challenges Facing Small Businesses

Small business owner reviewing cash flow documents

From challenges with hiring to maintaining product relevance, small businesses face countless obstacles every day. Financial challenges, however, tend to loom the largest. Not only are business finances a complex, ever-changing entity, but they’re also the engine of any operation. A good financial situation can keep a business running, while too many financial hardships can cause even the most pristine machine to sputter and stall out.

Luckily, improving your business’ financial health doesn’t come down to luck. The more you understand common small business pain points, the better you can learn to manage them.

Here are the top five financial challenges facing small businesses this year — and how to overcome them.

1. Lack of cash flow

Managing cash flow is a perpetual struggle for most business owners. According to the 2019 Small Business Trends report from Guidant Financial, 33 percent of small business owners surveyed cited a lack of cash flow as their greatest challenge.

“This is a constant, regardless of the year,” said Ken Wentworth, owner of Mr. Biz Solutions. It doesn’t matter how many assets you might have as a business owner. “Without cash,” Wentworth said, “you have no business.” Beyond covering major recurring costs like payroll and rent, you also have to pay business taxes, fulfill vendor invoices, and purchase supplies and equipment just to maintain operations.

One way to improve your cash flow is to experiment with your payment processes. “Work on stretching out when you pay cash for your purchases without being late,” Wentworth said, “and shortening the amount of time it takes to get your invoices paid.”

If you typically ask clients to pay you in 30 days, for example, consider cutting that window to 15 days. Just make sure you notify your clients and customers of the change before the next payment cycle so they’re not surprised or unprepared.

Related: How to Design Invoices That Get Paid Faster

You may also want to streamline your business’ payment process so clients can pay you faster and with less hassle, Wentworth suggested. If you don’t already accept major credit cards, that’s a good place to start, he said. You could also set up an online payment portal or accept payments through Fundbox, PayPal, or Apple Pay.

“Sending automated payment reminders is another easy-to-implement, yet effective measure you can take,” Wentworth said.

If you have clients or customers who regularly pay late, think about how you can incentivize them to pay sooner, said Matthew Ross, co-owner and COO of RIZKNOWS and The Slumber Yard. If “one of your key customers has 40-day payment terms, why not offer a 3 percent discount if they pay within 10 days?” he suggested.

Another option is to stretch out when you pay your suppliers. If the invoice says your payment is due in 30 days, pay on day 29, said Wentworth — and do it with a business credit card. “Depending on your billing cycle,” he explained, “that means you have an additional 30 to 45 days before you have to lay out cash to pay your credit card bill.”

Make sure you pay off your balance in full each month, though. Carrying a balance and incurring interest on your credit card isn’t advisable, Wentworth added.

2. Sticking to a budget

Another common business challenge is budgeting. “Budgets are absolutely key to running a clean operation,” said Ross. “By creating a budget and routinely reviewing actual results versus projections,” he explained, “you can keep a close eye on expense accounts and make timely cuts when needed.”

In order to stick to a budget, though, you have to create one that’s realistic for your business’ goals and profit potential. If this sounds daunting, don’t worry; there are many useful free budget templates out there to get you started right.

To create your budget, begin by looking at all your sources of income to get an idea of how much money you’re working with. Include your sales numbers, investment earnings, and any accounts receivable you have. Next, tally all your fixed expenses, like rent, equipment leases, or loan payments.

From there, make a list of expenses that are subject to change from month to month, like contractor wages, marketing, travel, or office supplies. Finally, include enough money to cover emergencies and expensive one-off purchases like equipment or accounting software—we’ll expand on this later.

After you’ve created annual and quarterly budgets, start scheduling monthly budget reviews to ensure you’re on track. “Let’s say your revenue goal for the month is $100K and you see on the 15th that you are only at $30K,” Wentworth said. Then “you can motivate your sales team to step up to close the gap during the last two weeks of the month.”

Building and reviewing a budget regularly creates accountability, he explained, and also helps you make smarter financial decisions throughout the year.

3. Marketing

According to the Guidant Financial survey, 15 percent of business owners said marketing and advertising is one of their top challenges. “The three main online advertising platforms (Google, Facebook, and Instagram) have become extremely competitive,” said Ross. “It’s difficult for small businesses to compete with the large, dollar-intensive marketing and CPC campaigns that large companies routinely run,” he explained.

As a result, some small businesses are being left behind. According to Infusionsoft by Keap’s 2019 Small Business Marketing Trends Report, 29 percent of business owners said they won’t use digital marketing in 2019, while 22 percent said finding the time and resources to market remains their biggest challenge.

To stay competitive without draining your cash reserves, you need to get creative. Instead of simply advertising, Ross said, try developing valuable SEO content. “We’ve found that if you create helpful videos that address related topics in your industry,” you can improve your search ranking and attract potential customers looking for similar products or services, Ross explained.

4. Lack of capital

Cash is essential to keep your business afloat, but paying the bare minimum to cover basic operating expenses only gets you so far. To grow your business, you also need a healthy amount of capital to invest in bigger projects. More working capital can free you up to focus on long-term growth efforts, like hiring, relocating, or purchasing a second business. According to this 2018 survey, 49 percent of business owners say they want to spend any additional capital on expansion.

In terms of small business challenges, Guidant Financial ranks a lack of capital on par with a lack of cash flow. That’s partly because acquiring funding can be difficult. According to Biz2Credit’s May 2018 Small Business Lending Index, big banks only grant about one in four small business loan applications. Though the approval rating has gone up slowly since the recession, it still hovers around 25 percent.

The major limiting factor in approval seems to be tied to business credit. According to Nav’s Small Business American Dream Gap Report from 2015, one in five business owners who applied for funding in the last five years were denied, and 82 percent of all the business owners surveyed didn’t know how to interpret their credit scores. The research also showed that individuals who have a better understanding of their business credit score are 41 percent more likely to be approved for a loan.

That’s why it’s critical to lay out a plan for identifying and improving your business credit score. Then, before you move forward with financing, get clear on how you would use any extra capital and check out your options to see what makes the most sense to help you grow your business.

5. Unforeseen expenses

When you’re already busy managing a multitude of recurring business expenses, it’s easy to forget about the costs you can’t easily predict. Think: damaged equipment, stolen inventory, or a broken AC system. In a 2018 small business accounting survey from Clutch, 35 percent of small business owners cited unforeseen expenses as their main financial challenge.

That’s why Ross recommended building emergency expenses into your budget every quarter, so nothing is a surprise or source of stress.

How much money should you allocate for these unforeseen costs? Wentworth said your past records can help you better predict what you might spend. For example, maybe you operate 10 vehicles for your business and need to gear up for potential repair costs. “Use your expense history—if in the prior three years, you spent $600 per vehicle for these types of expenses, then add $6K in your budget for that,” Wentworth suggested.

Of course, no matter how much you pad your budget, occasional crises happen. When that’s the case, try to figure out how you can offset that cost and bring your budget back on pace, said Wentworth. Can you ramp up sales for the month, for example? Cancel an upcoming work trip? Decrease your marketing spending? Unforeseen expenses are inevitable, but the more adept you become at predicting and preparing for them, the more stable your business financials will be.

Overcoming common business challenges comes down to education and preparation. Taking the time to determine your small business’ pain points and lay out a plan of attack can help set you up for success.

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Tags: Business GrowthFinancing