Small businesses are at a disadvantage compared to their larger and more established counterparts. Small businesses face many challenges. They can range from losing talent to needing to differentiate themselves from the competition. But the biggest trials entrepreneurs face is often related to finances.
According to Business Insider, 50% of small businesses fail in the first five years; 29% run out of cash while 82% experience problems with cash flow. When it comes to finances, where does it all go wrong? Here are the five most common financial challenges for small business owners.
Access to Funding
“You have to spend money to make money” is an adage passed down by entrepreneurs for generations. And according to Visual Capitalist, 29% of small businesses fail because they eventually run out of capital. Access to the right funding solution is crucial in business growth. Unfortunately, many small businesses don’t meet the minimum requirements to qualify for financing. And turning to alternative lenders can mean having to pay higher interest rates which inevitably dig them into a deeper financial hole.
Because many entrepreneurs lack sufficient capital to launch their businesses, they turn to traditional loan options or alternative financing solutions. Unfortunately, because their business is just starting out, how their product or service will perform in the market is yet to be determined. And while the company has great potential, if sales are slow in the beginning, business owners may find themselves struggling with repaying the debt as their business fights to find stability.
From the breakdown of vital equipment to accidents or even lawsuits, not all expenses are foreseen. Unanticipated costs can threaten a business’s budget and cause them to spiral into debt. While insurance will cover you to a certain extent, there are still expenses that can add up such as lawyer fees and loss of sales.
Inconsistent Cash Flow
According to SmallBizTrends, 40% of small businesses are profitable while 30% are losing money. Consistent cash flow should be the business’s top priority. You need to pay your bills, suppliers, and employees.
Small businesses which have seasonal products or services with little or no sales need to be most careful with their expenses.
Day-to-Day Money Management
According to CPA Practice Advisor, only 40% of small business owners feel they are knowledgeable on finance. And unfortunately, the lack of knowledge in how to properly manage money catches up with business owners.
Business owners may mix personal purchases with business expenses. They may try to save on costs by doing the books themselves rather than hiring an accountant or bookkeeper. Eventually, their lack of experience in dealing with invoices, receipts, and keeping track of expenses leads to delayed payments, incorrect recordings, and inaccurate calculations.
While the rate at which small businesses fail is disheartening, entrepreneurs should remain optimistic. Recognizing the common reasons why most startups fail, is a step towards preparing to avoid falling into debt traps and money mismanagement.
Until the next time,