One of the major aspects of any business is the financial stability. While cash flow is very important, it is even more important that you are in control of your finances. You should always have a backup plan as far as your financial stability is concerned.
Financial challenges are some of the most painful ones entrepreneurs have to deal with. However, making a list of financial challenges and staying close to them can help a small business survive even in times of economic instability.
We have compiled 10 financial challenges that most businesses come across, and not just that, we have also enlisted the remedies that could be looked at in such a scenario.
1. Lack of sufficient working capital
Working capital is the life blood of any business and it is the most important responsibility of any entrepreneur to have at least 6 months expenses as working capital which gives him enough breathing space to focus on acquiring new customers and building products. The most relevant way to avoid this by figuring out a way to cut your costs by 20% and put that aside to build up working capital. If you’re a start-up that is yet to make profits, make sure you are adequately financed.
2. Sales are good but profits are low
This is another major setback that most of the businesses face at some point or the other. Generally, such a situation indicates over-spending or hidden costs eating away at your bottom line — your expenses could be out of control. To avoid such a situation proactively create a purchasing policy and system to ensure that you are buying the right materials at competitive prices from vendors that add value. Ensure there is supervision of policies, ordering, receiving and reporting. Don’t hesitate to revisit vendor selection and old contracts to start price negotiations. Lastly, if you frequently make online purchases, use free apps to track spend, hunt bargains and streamline online purchasing.
3. Not being ready to face sales slump due to unavoidable reasons
According to a famous venture capitalist, Fred Destin,
“In startups the only real sin is running out of cash, and the cardinal sin is running out of cash unexpectedly. So whilst you may not need a CFO, you sure need someone who understands cash flow and can give you the confidence to know when it’s running out.”
To avoid such a situation, keep a check on your financial statements so that you are able to forecast cash needs. It is important and inevitable to have total control on the movement of money.
4. Receiving late payments from clients on a regular basis
80% of small businesses are still plagued by late payments and of this happens too frequently, it can potentially kill your business in the long run. It is very important to tighten up credit terms or create policies and processes to manage the situation. To avoid such a situation, some of the remedies could be to pull business credit for new customers, communicate payment policies early and often, incentivize early payments, make it convenient for customers to pay and enforce late payment penalties. Most importantly, do it all with a smile.
5. Paying bills late on regular basis
As important as receiving payments might look, it is equally important to pay bills on time as well. Find out the reasons for late payments. If it’s a cash flow problem, you need to start renegotiating your payment terms; or start looking for customers with better payment terms. Otherwise, it’s important to make a monthly budget and follow it. Set aside a specific day of the week just to go through accounts payable and sign checks.
6. Too many sales promotions, coupons and markdowns just to stay afloat
Businesses retort to sales, promotions each time a business runs slow, however, if sales are slow, offering excessive discounts is not the answer. Consumer-oriented sales promotions can drive short-term sales to offset competitive pressure, yet threaten the long-term survival of your brand. Price wars come with high casualties – most notably, reduced profit margins. Instead, revisit your business and revenue model to find answers.
7. Not choosing the right funding option
It is very important to understand the one needs to be very confident about the reason one is looking for funds. A variety of funding options are available to small businesses: bootstrapping, friends and family, crowdfunding, business loans, grants, venture capital, angel money, etc. Despite of having so many options it is very important to have clarity on your current financial picture and assess risk tolerance for each funding vehicle. Do a thorough research and then only finalise your funding options
8. Unorganised book keeping habits
Books of finance hold a very important place in running any business venture, however, small business owners are usually bad record keepers. And they consider this to be one of the most boring tasks in a business. Hiring an organized book-keeper can save you a lot of time. Find someone on your team who can take on this responsibility. A good administrative assistant can sometimes do an effective job at this.
9. Not being good at cash flow management
Cash flow literally translates to “money in, money out.” Monitoring cash flow can forewarn you of a need for cash and reveal cycles in your business; better preparing you for the financial road ahead. Staying on top of your cash flow position can be tedious. Thankfully there are free templates, cash flow calculators and paid apps which you can use to get on top of the cash flow management game.
10. Improper revenue and expense projections
For any business to flourish it is very important for the entrepreneur to know the various revenue sources and the expenses that will be incurred in the course of business. If your business is fairly young it’s hard to predict revenues. But expenses can be predicted because most of them usually remain the same month on month, except for some unforeseen expenses. It again depends on the nature of business. Always be thoughtful about your expenses rather than being impulsive. Because in case of impulsive decisions there’s a probability of expenses going off track. Always have a budget in place during your decision making process.
Finances are the life blood of any business and no business can run without a consistent cash flow hence it is very important to be financially prudent and track your finances to stay ahead of the game.