Owning a small business isn’t easy. From the myriad challenges unique to start-up entrepreneurs and other Small and Medium-sized Enterprises (SMEs), few are more pressing than financial struggles. One of the most common, and stressful, financial concerns is cash flow management.

In this article, we will evaluate a few major contributors to cash flow troubles, and highlight other leading financial challenges that many small businesses owners face today, with regard to financial statements, pricing management, and systems and processes.

 

Cash flow— Why is it Important?

Even if a small business’s forecast for the upcoming quarter appears to be profitable, it means nothing if they don’t have sufficient funds on-hand to pay monthly suppliers or meet the next week’s payroll. Cash flow is about timing; the cycle of cash-in and cash-out needs to be well balanced in order to avoid unexpected crises.

Positive cash inflow is the lifeblood for small businesses; cash sources from customer payments, capital infusions, or investment interest will recycle back to fund operating expenses that keep your business running, such as employees, raw materials, and rent. While high positive cash flow opens doors to business growth and new investments (hiring new employees or opening another location), negative cash flow, where more money is going out than coming in, can be fatal to small business success.

 

Contributors to Cash Flow Struggles

Three common sources that facilitate cash flow problems for SMEs are described below:

Poor Planning – For seasonal businesses, it’s important to project your annual, fixed expenses, as well as compose a forecast for variable expenses. By analyzing past business patterns and anticipating potential shortfalls during slow periods, a business can focus on a target sum to accumulate during its better times to use when times are leaner.

It’s also vital to establish/ensure you have a stable banking relationship and an appropriate line of credit. Good credit and a reliable bank can help ensure there’s adequate cash during slow periods, and thus protect your business from a cash flow crisis.

As you build your business, another form of “credit” that can be invaluable in difficult times is strong client relationships. By establishing a loyal client base, a business can occasionally request and receive advance payments; this funding can help buffer your business in slower inflow periods.

Poor Credit and Collections Practices— Don’t jump at every opportunity for new clients or work without setting up the proper systems to evaluate credit and collect payments. Without a formalized credit and collections process, the likelihood of inadequate, inaccurate, or outdated information increases substantially; all of which can lead to delayed, even unpaid, customer accounts receivable. It’s best to establish your rules for credit and collections in advance, whether that involves obtaining a deposit, specifying a pay window, or processes for following up on delinquent accounts.

Challenges in Projecting Expenses— A financial projection can be simply defined as a forecast of future revenues (and cash collections) and expenses (and cash expenditures). Successful companies typically develop both short and mid-term projections; using internal data/past history and external market factors to better predict and control their financial condition for the future. While many factors go into creating a financial projection, including sales, payment patterns, expense levels (fixed and variable), and capital investments, small business owners often struggle with projecting their expenses early on, accounting for variations in expenses, and determining what the immediate needs of the company are.

The simple fix is a basic accounting system; it can help the process by allowing you to generate reports based on past income and expenses for more accurate projections of cash flow and sales. While this is obvious to some, many small business owners do not have financial expertise.

 

Other Financial Challenges

Unfortunately, problems aren’t limited to cash flow. Lack of accurate (or any) financial statements, for example, is a malady that plagues many small businesses. Companies often neglect their financial reporting duties, either never reviewing them or not taking the time to account for them accurately enough to be useful and meaningful. Additionally, poor pricing and money management can damage organizations quickly, and lack of standardized processes for a business can cause chaos and inefficiency.

Some financial challenges appear despite doing everything right, excellent planning, thorough documentation and effective systems. Catastrophic change and unforeseen expenses can affect any business. Expenses can arise from government levies or economic fluctuations, as well as the loss of key executives or natural disasters. A successful business plan needs to include contingencies to be able to access cash when unanticipated circumstances arise.

Financial challenges are undoubtedly common in small businesses, but that doesn’t mean you have to experience the consequences of all of them. Give your company a thorough examination to see where the pitfalls of your business plan and cash flow management are. Set money aside or arrange for credit facilities for unexpected circumstances and take a look at your past financial records to most accurately prepare for your future.

Strong financial systems are the key to strong companies. Lauber Business Partners can help you manage your financial situation and help you prepare for when problems arise. Lauber is an experienced partner to many small and mid-sized organizations and is committed to collaborating with you with honesty, integrity, and professionalism. If you want to secure your financial situation, don’t hesitate to contact Lauber for help.