Running a business is no easy feat. From managing employees to keeping customers happy, entrepreneurs have their hands full just with operational concerns. But underpinning it all are the financial challenges that can make or break even the most promising venture.
Lack of proper financial planning for small business can quickly derail things, which is why it’s crucial for owners to get a handle on the most prevalent money problems they may encounter. With some foresight and preventative measures, you can avoid going down the road that far too many businesses have traveled before.
Cash Flow Woes
One of the biggest hurdles businesses face is inconsistent cash flow. You may have plenty of sales revenue coming in, but if you aren’t carefully managing the timing of when cash goes out to pay expenses, you can find yourself in a crunch.
Unpredictable cash flows make financial planning for small business extremely difficult. How can you set a budget, make investments, or even just pay your employees reliably if the amount of money you have on hand is constantly fluctuating? The struggle is real for businesses that are growing quickly or have seasonal sales cycles.
A cash flow shortfall may force you into relying on high-interest debt to cover gaps. This just digs the hole deeper in the long run as you get behind on payments and rack up penalties and interest charges. Getting ahead of cash flow with good forecasting and cash management is critical.
High Overhead Costs
Overhead refers to all the operational expenses required to run your business, from rent and utilities to payroll and insurance. While a certain level is unavoidable, overhead that gets out of control can eat up an unhealthy portion of your profits.
Overhead costs are the quintessential example of financial drains that slowly nibble away at your business’s financial health. Since they are fixed expenses that recur each month, they don’t always get the scrutiny they deserve when times are good. But a downturn in sales can quickly expose how unsustainable high overhead is.
Financial planning for small business needs to analyze overhead thoroughly. Cutting unnecessary costs, locking in affordable long-term rent, negotiating better insurance rates, and other tactics can help get overhead to a manageable level. The lean mindset is often required early on.
Lack of Financial Literacy
It’s one thing to be passionate about the products or services your business provides. But having a solid grasp of accounting, financial monitoring, taxation, and money management principles is something many entrepreneurs lack. This financial illiteracy can prove incredibly costly over time.
Without understanding how to properly track revenue, expenses, profit margins and other key metrics, you are essentially running blind from a financial perspective. Major money leaks, tax overpayments, and missed opportunities for cost savings often go unnoticed. It’s near impossible to engage in effective financial planning for small business without this foundation.
The good news is that financial literacy is something business owners can work on over time. Taking courses, hiring experienced advisors, and using modern accounting software can help overcome this deficiency. The investment is well worth it to steer clear of so many preventable financial pitfalls.
Managing Growth Appropriately
Nothing says “success” like a growing business, right? While expansion is a sign that things are headed in the right direction, it comes with a new layer of financial complexity. Growing too quickly without the proper financial planning for small business can create major headaches.
Rapid growth requires making major investments in inventory, equipment, facilities, and hiring new team members. Managing the cash flow challenges that come with scaling can catch many owners off guard and leave them overextended. Taking on too much debt to fund growth is a scary situation that can jeopardize the entire business if things don’t go as planned.
The solution is to take a prudent, moderated approach to growth that aligns with your financial resources and capabilities. Have a plan for how much you can realistically scale up each year while still maintaining positive cash flow. Grow in phases and have a cash reserve to hedge against worse-than-expected scenarios. Patience is key.
Personal and Business Finances Intertwined
Plenty of business owners struggle to keep their personal and professional finances fully separated, especially early on. Using business funds to cover personal expenses, or vice versa, is surprisingly common and inevitably leads to complications.
From tax implications to skewing your metrics for financial planning for small business, the risks of comingling finances can’t be overstated. It becomes increasingly difficult to understand the true financial health of your business with such lack of organization.
The straightforward solution is to establish a dedicated business bank account, credit cards, and accounting practices right from the start. Clearly delineating personal vs. business spending and income streams allows you to analyze your company’s finances accurately. While it requires some discipline, is it well worth removing this complication from your plate.
The Bottom Line
Steering clear of these all-too-common financial pitfalls is a must for any small business owner who wants to achieve long-term success. While financial management is undoubtedly one of the more challenging aspects of entrepreneurship, a proactive, educated approach to financial planning for small business can prevent so many avoidable problems.
From maintaining healthy cash flow to keeping operating costs in check, regularly analyzing your numbers is critical. With some foresight, and the assistance of accounting tools and advisors as needed, you can absolutely get a handle on your finances. Avoiding these financial obstacles will go a long way in putting your business in a position to thrive.
