9 Major Financial Challenges Small Business Owners Face

A little over half a million businesses in the US fail every year. Most of them are small and medium-sized companies. Surprisingly, the pandemic didn't wreak as much havoc as expected.

But, this by no means is a signal for small business owners to let their guard down. Some companies are beginning to find their footing after almost two tumultuous years.

Others are still battling new challenges and finding it hard to be proactive in such an uncertain environment.

Smaller companies face many more financial challenges than larger ones. This is mainly due to their limited access to resources. Knowing some of the challenges to expect is key to planning well enough to avoid them.

If you're a small business owner, here are some of the major ones to look for:

1. Lack of Capital or Funding

When you think of small business financial challenges, capital is one of the first that comes to mind. It's not only needed to get your business up and running. It's also essential when it comes to ongoing investments such as hiring new staff or taking on new ventures.

You'll need to provide evidence that your business idea is sound for any of these options. If it's a loan for working capital, they'll want to see how well your business is doing. You'll need to have a business plan and financials prepared for this.

2. Budget Issues 

Unfortunately, many small businesses don't budget. These owners have a short-term outlook. They focus on the day-to-day running of their business, instead of the big picture.

Other businesses do create a budget, but it's not a realistic one. This is sometimes as bad as not having a budget at all. Meanwhile, others have a great budget but don't stick to it.

At the very least, your budget should include:

You should also have savings for unforeseen events. Flexible budgeting is sometimes needed when it comes to small business finances. This means making financial adjustments over time based on your circumstances.

Whether you use flexible or static budgeting methods, your budget should be realistic. Budgets provide a roadmap for the allocation of your finances. Not using one is like trying to find a location you've never been to without a map.

3. Limited Cash Flow

Having a healthy cash flow allows you to pay your expenses when they are due. It's also one of the major financial challenges faced by small businesses due to poor budgeting.

Cash flow involves the balancing of both payables and receivables. You also need proper forecasting. Financial forecasts look at past performance. You can then compare this against your current financial environment.

Businesses should also have contingencies in place for unforeseen circumstances such as:

And of course, as most businesses learned - a pandemic. You'll need to have a plan in place to ensure your cash flow isn't affected.

4. Reporting Issues

Owners of small businesses often wear many hats within the business. This sometimes results in things falling through the cracks. Lack of proper financial records can lead to incorrect revenue calculations. 

This impacts your cash flow. It can also result in the recording of inaccurate figures on your tax forms. This raises red flags that can lead to interest charges, fines, or even jail time.

Small businesses should use a bookkeeper or invest in financial reporting software for better accuracy.

5. Tax Compliance

Filing your taxes based on inaccurate financial records can lead to non-compliance. There is a penalty for underpayment. However, many small businesses end up paying too much.

Often this overpayment is due to missed deductions. It may also be a result of not claiming credits you're entitled to. Although you will get a refund, it's cash you could use toward day-to-day expenses.

6. Inability to Pay Debts

They say without risk, there's no reward. Entrepreneurs know this all too well. However, you need to find a balance when it comes to risk-taking.

Many small business owners overextend themselves. This makes it difficult to pay debts on time. Some borrow to pay these debts, only to find themselves in a deeper hole.

You should try to minimize your debt at all costs. Start by cutting costs. This may include selling equipment you no longer use. Or you can find a smaller location with a lower rent.

Some other areas you can look at include:

Each of these can help you better manage your cash flow and debts.

7. Commingling

Commingling refers to the mixing of personal funds with business funds. Although it isn't illegal, it can complicate the running of your business.

It often leads to cash flow issues and can affect your company's value. Accessing funding for your business can also become difficult.

It will become an issue if you're audited by the Internal Revenue Service (IRS). This is the last thing any small business needs.

Having a separate account for your business is one of the core principles of business.

8. Marketing Costs

Marketing often requires a substantial investment to be effective. Unfortunately, many small businesses don't have this luxury.

Many continue to funnel money into marketing initiatives to stay competitive. But it's often at the expense of other areas of the business.

Companies can avoid this by setting a realistic marketing budget and sticking to it. It also means being creative to get the best use of limited funds. 

9. Unforeseen Expenses

What was one of the major lessons from the past year and a half? The importance of planning for unforeseen occurrences.

Inevitably, there will be situations that occur that will affect your cash flow. But having contingencies in your budget will help alleviate these.

You should also make lucrative financial investments when your business is doing well. These will grow over time and can assist when things aren't going as well.

Overcoming the Financial Challenges Most Small Businesses Face

Most businesses face periods of financial challenges throughout their existence. However, it can be detrimental for small companies. Some often don't recover at all.

You need to safeguard your company against the common small business challenges mentioned above. Invest in tools that can assist. This can mean hiring a bookkeeper or using management software to keep track of finances. 

Allen Fairview Chamber of Commerce also has many useful resources for small businesses. Our goal is to enable our members to prosper. We can help you too! Learn more about becoming a member.