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Financial Challenges for Small Businesses: Growth Playbook

Updated: May 2

We live in a rapidly changing world where businesses have to adapt to every market change. Through generations, we've seen businesses adapt to entirely new marketing channels, be it the web and now social. Small businesses, in particular, face a range of financial challenges as they grow and succeed. There are piles of problems and challenges waiting at your front door, demanding different solutions. Financial Challenges for Small Businesses like insufficient working capital, cash flow issues, and budgeting problems can hinder growth. And the thing is, what worked for a business a year ago now, might not be the best approach. So, with changing times come changing problems that demand new solutions.


The Importance of Financial Stability for Small Business GrowthThe number one factor that a business needs for growth is financial stability. Most small businesses don't get a chance to grow because of a lack of funds. Achieving financial stability is crucial for small businesses to overcome growth hurdles and seize new opportunities.



Financial challenges for small businesses


Common Financial Challenges Faced by Small Businesses


Insufficient Working Capital and Limited Cash Flow

Working capital and cash flow are two of the most fundamental concepts of financial analysis, even more important when starting a business. Working capital means the difference between a firm's current assets and current liabilities. Usually, it is the amount of money a company has available to pay its short-term expenses. Under short-term expenses come the original loan that a person took when starting their business.


Positive working capital or an increase in working capital means the company has more assets than current liabilities, and it is capable of covering its short-term expenses. However, negative working capital is when the current liabilities exceed the current assets, which means a company most likely can't pay bills that are coming due.


This can cause legal problems, including the seizure and closure of your business, employees going unpaid, or losing sponsors. The easiest way according to research, to improve your situation if you feel you are moving towards a negative working capital is to try and cut your expenses by 20% and put that amount aside every month to build your working capital. Another quick way to bring in cash is to have a sale. Looking for assets you can sell to bring in extra money, helps as well.


Cash flow refers to the amount of cash that moves in and out of a company in a specific period of time. Cash flow involves balancing accounts when an amount is paid and when an amount is received. Therefore, payable and receivable amounts. By maximizing the cash-to-cash conversion cycle, companies ensure they have enough cash flow to access capital.


Apart from this, you should develop cash flow forecasts based on historical performance and current conditions, that is industry changes, economic downturns, customer shifts, and use scenarios to develop a realistic financial plan. Invoice efficiently to maximize liquidity.

For more tips on working capital management and cash flow forecasting for small businesses, check out our blog post [internal link].


Not Paying Bills on Time

When you start a business, you anticipate payments. Receiving payments on time is an important part of running your business, and so is paying bills on time. Occasional late payments might be overlooked by suppliers or staff, but these damage supplier relationships in the long term and result in being cut off from needed services and constantly running behind on the debt.


Staff paychecks, utility bills, material bills, and other costs of business operations continue as usual, regardless of whether or not you have been paid. And if they're not paid on time, it creates a chain of debt which can be harmful to any company's financial health. Create a monthly budget so you're aware of how much money has to be aside for bills. Set a day every week to sign on checks and make payments, so you're not behind on bills and they don't add up.


Not Sticking to a Realistic Budget

Another common business challenge is budgeting. Budgets are an absolute key to running a clean operation, doing so will not only help you plan for the future, it will give you a tool for analyzing expenditures and the ability to make changes whenever needed. It helps in keeping a close eye on expenses and makes cuts when required.


The struggle for most small businesses is creating one. It may seem daunting, and if not updated regularly, it might seem like a lot of work and scary numbers. One piece of advice is to make a realistic budget, know the ins and the outs of your business, and update them. Having it all in one place might help you make better decisions than scaring you. It's a huge help for business goals and profit potential. At a minimum, every small business budget should include these five elements:

- Fixed costs

- Variable costs

- One-time costs

- A cash flow statement

- Profits (what's left after all of the above are factored in)


Solutions to Overcome Financial Challenges for Small Businesses


Identifying and Cutting Hidden Costs

If your sales are good but profit is bad, this could indicate overspending or some hidden costs increasing your expenditure. For this, revisit your vendors and make sure the materials you're buying for your business bring value. Track your spending and streamline purchases.


Mixing business and personal finances is another common pitfall - open a separate business account and use it to manage all company-related inflows and outflows. Make sure to pay your salary, a fixed amount, from that account rather than grabbing any money at the end of each month.


Implementing Effective Pricing Strategies

Mispricing your products can significantly impact your profitability. Develop an effective pricing strategy before you start your business. Decide your unique selling proposition and niche, and make sure to research how your competitors are pricing similar products or services. Finding the optimal price point can help you maximize profits while remaining competitive.


Leveraging Finances for Growth Opportunities

Make the best use of your finances to fuel the growth of your business and access new opportunities. Reinvest profits strategically, explore expansion into new markets or product lines, and investigate financing options like small business loans or investor funding if needed. A strong financial foundation will empower you to seize growth opportunities and outpace the competition.


According to the 2022 Small Business Credit Survey by the Federal Reserve Banks, 66% of firms with less than $1 million in annual revenue faced challenges with obtaining funds for expansion or operations over the prior 12 months.


For your growth,

Team Shoonyas

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