Top Financial Issues Small Businesses Face

Top Financial Issues Small Businesses Face

Top Financial Issues Small Businesses Face

As an entrepreneur, you might face many problems while running the business. In today’s digital era, surviving in a fierce market can pose a difficult challenge to achieve your goals. There are times when small business owners tend to take bad financial decisions that affect their overall business. Therefore, listed below are the top financial issues that you can inculcate in your business so that you can operate without making any mistakes.

Inconsistent Cash Flow

Cashflow is a top priority for every small business. You need liquidity to channel the funds into other strategic priorities. Therefore, it is always a struggle for every entrepreneur to maintain positive cash flow because you need liquidity to order the channel of funds into other top priorities. When you notice negative cash flow, it can trigger a domino effect causing a chain of poor profitability. This can result in affecting the customers’ cash flow. You tend to forgo new opportunities to meet the current financial obligations. This means that your business never realizes it’s full potential and loses the ability to test new ideas for the same. Proper budgeting and planning are essential to maintain cash flow. Even fast invoice payments will help you manage cash flow.

No Access to Funding for Growth

Finding the right funding solution is important for loan repayment schedules and rates. There are hundreds of financing companies that provide small business grants to help companies expand globally. However, but many small businesses are often denied by traditional grant programs, government funding, and bank loans. Due to the issues of personal guarantee requested by the funding companies, limited operating history, low gross margins, or other requirement that do not meet the criteria, it becomes challenging to get funding for the business. As an entrepreneur, you need to find a trusted lending partner who can build relationships where you can access the fund with ease. To gain access to the funding pool, you must approach angel investors or venture capitalists.

Inappropriate Pricing

Customers are always willing to pay more when they have confidence in your company’s products and services. A small company will take a lot of time to build confidence among its customers, but it is not impossible. Some companies choose to set the prices according to their competitors. On the other hand, other entrepreneurs set low prices to attract customers and increase sales volume. This strategy can affect the cash flow, affect the bottom line, and turn it into a negative. But the fact is that the pricing system does not necessarily drive the customers. Once you personalize your products and services and make the purchase experience original, you can easily gain the customer’s trust.

Low Profit

The reason for having low margins can be due to low prices or too many ongoing costs. If you spend too much money in one business aspect like purchasing expensive equipment or having too many staff, you will probably push your business towards losses. Profits are often lowered due to many things such as:

  • Hidden or unseen costs,
  • Emergency repairs,
  • Tax and insurance cost,
  • Inconsistent execution,
  • Lack of market awareness, and many more.

To overcome any business-related issue, you need to track the unnecessary expenses and deal with problems one at a time to generate profits. Managing the cash flow is more important on an everyday basis. If you feel that managing profits and the cash flow can be overwhelming, you can always hire a professional accountant so that you can concentrate on the aspects of your business that need your focus. The accountant can even point out areas where you can control the expenses or where there is potential growth. Leaving the financial aspect of the business in the hands of the expert can be beneficial for the business. This saves you time and focuses on the overall growth of the business.

Unexpected Expenses

When running a business, not everything goes according to what you plan. Certain things often occur which later might affect your business for a short or long term. Sometimes, there are unforeseen expenses that might affect your budget. It is advised to keep an account of all the expenses that happen daily. When you account for even the relatively small expense in the budget, you might get an idea of your company’s financial status and where you need to work on the most.

Over-reliance on Credit

Some businesses usually rely on their business credit cards and personal credit lines of the owners. Relying a lot on credit cards can often affect in the long run if the company is not able to pay back in the future. When the company delays the payment of their debt, they might have to pay an increased interest rate. This can severely burden the business when it is growing. Therefore, keep some cash in your bank account and don’t ONLY rely on credit cards.

It is not necessary for your company’s financial status to be perfect all the time. With time and the right effort, you will be able to achieve success and growth. So recognize the issues and look for possible solutions.

Sources of Business finance

Every time people plan to established or run a business, the very first concern people do make is where to source finances for the business. Basically, finance provides a backbone for any business; actually, it acts as a solid bedrock for growth and success for any business. Globally businesses look for capitalists to improve their business’ capabilities and grow it is the desired way. However, the primary objective of finance is to assists the enterprise of all types and extends help so that they can enhance their services at the lowest possible amount. It should be noted that finances assist businesses to efficiently and effectively control the environment.

Sources of business finance can be studied under the following heads:

Short Term Finance

Short-term finance is needed to fulfill the current needs of an enterprise. The current needs may include payment of taxes, salaries or, repair expenses, payment to the creditor, etc. The need for short term finance happens since sales profits and purchase payments are not entirely the same at all the time. Sometimes sales can be low in comparison to purchases. New transactions can be on credit while purchases are on cash. So short term finance is required to complement this disequilibrium.

Sources of short term finance are as follows:

Bank Overdraft

Bank overdraft is a very widely used source of business finance. Under this, client can draw a certain sum of money over and above his original account balance. Thus it is less complicated for the businessman to meet short term unexpected expenses.

Bill Discounting

Bills of exchange can be discounted at the banks. This provides cash to the holder of the bill that can be used to finance immediate needs.

Advances from Customers

Advances are primarily demanded and obtained for the verification of orders. However, these are also used as a source of financing the function essential to implement the job order.

Installment Purchases

Purchasing on installment provides more time to render payments. The deferred payments are used as a source of financing little expenditures, which are to be paid instantly.

Bill of Lading

Bill of lading, as well as other export and import documents, is used as an assurance to take a loan from banks, and that loan amount can be used as finance for a short period.

Banking Institutions

Different financial institutions also help businessmen to get out of financial challenges by providing short-term loans. Some co-operative societies can arrange short term financial assistance for businessmen.

Trade Credit

It is the typical exercise of the businessmen to buy raw material, shop, and spares on credit. Such deals result in increasing accounts payable of the business which is to be paid after a certain period. Goods are traded on cash, and payment is made after thirty, sixty, or three months. This allows certain freedom to businessmen in meeting financial challenges.

Medium Term Finance

This finance is needed to meet the medium term requirements of the enterprise. Such finances are basically necessary for the balancing, modernization, and replacement of equipment and plant. They are also required for re-engineering of the business. They aid the management in completing medium-term capital projects within the planned time. Following are the sources of medium-term finance:

Commercial Banks

Commercial banks are the primary source of medium-term finance. They offer loans for various time-periods against appropriate securities. At the end of the contract of terms, the loan can be re-negotiated, if required.

Hire Purchase

Hire purchase implies purchasing on installments. It enables the business house to have the required goods with payments to be made in future in agreed installment. Not surprisingly that some interest is always imposed on outstanding amount.

Financial Institutions

Several financial institutions also give medium and long-term finances. Besides providing finance, they also offer technical and managerial assistance on different matters.

Debentures and Terms Finance Certificates

Debentures and Terms Finance Certificates are also used as a source of medium-term finances. A debenture is an acknowledgment of loan from the business. It can be of any period as agreed among the parties. The debenture holder delights in return at a fixed rate of interest.

Insurance Companies

Insurance organizations have a substantial pool of funds contributed by their policyholders. Moreover, Insurance vendors grant loans and make investments out of this pool. This kind of loans is the supply of medium-term financing for different businesses.

Long Term Finance

Long term finances are those which are required permanently or for more than five year’s tenure. They are generally desired to meet structural adjustments in business or for significant modernization expenses. These are also needed to establish a new business plan or for long term developmental ventures. Following are its sources:

Equity Shares

This technique is most widely used across the world to raise long term finance. Equity shares are subscribed by the public to generate the capital base of a large scale business enterprise. The equity shareholders share the profit and loss of the enterprise. This method is secure and secured, in a sense that amount when acquired is only paid back during the time of wounding up of the business.

Retained Earnings

Retained earnings are the reserves which are generated from the excess profits. In times of need, they can be used to finance the business project. This is also called plowing back of profits.

Leasing

Leasing is also a source of long term finance. With the help of rental, new equipment can be acquired without any massive outflow of cash.

Financial Institutions

Different financial institutions also provide long term loans to business houses.

Debentures

Debentures and Participation Term Certificates are also used as a source of long term financing.

In Conclusion, there are various sources of finance. There is no hard and fast rule to differentiate among short and medium-term sources or medium and long term sources. A source, for example, a commercial bank can provide both a short term and a long term loan according to the needs of the client. However, all these sources are frequently used in the modern business world for raising finances. Here we have the best idea for you to increase your business funding.


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