While large companies and international conglomerates manage to gather all the fame and attention, small businesses are the ones that make economies stay stable.
However, it is this group of businesses that faces most of the problems as well. If you are starting a business or already own a small one, you have to prepare for the common financial challenges that you will face.
It is nearly impossible for small businesses to not face these problems at all. However, early preparation requires early advice from someone who understands financial matters to the core.
So, today is your chance to read some golden pieces of advice from Ido Fishman, the financial and investment expert, about the common financial challenges that small businesses face.
You will also have the opportunity to read practical solutions that he suggests to these problems.
Common Small Business Financial Problems and Their Solutions
#1. The Initial Funding
As per Ido Fishman, the first issue with small businesses is when they try to be too optimistic about things.
The aspiring entrepreneurs are so keen to become businessmen that they ignore to pay attention to some really important details while starting a business.
They are usually underfinanced right from the start.
You can see how these businesses operate and cut costs to get a good whiff of their financial issues. In many cases, they are trying to cut their costs in the marketing area.
Well, that’s mistake number two, and one that businesses cannot afford to make at any point.
If you are thinking about starting a business, you have to make sure you have proper finances to go about it. Obtain your funding from every source possible.
Do not be optimistic about your estimates. Always think that the money you have will not be enough.
At the same time, try to convince yourself that you will not be able to collect more money than you have already gathered through your funding campaigns.
Use all the resources possible. If you have family members who are willing to contribute, go ahead and accept their offers. Prepare your pitches to get investments from venture capitalists, angel investors, etc.
You want to make sure that you have enough funds right from the start.
If your business is choking on funds right from the start, you will not be able to get anything right.
You will always find yourself struggling financially.
Of course, you cannot cut your marketing costs too much because that can affect your bottom line in a negative way as well.
#2. The Unforeseen Events
It is common for small business owners to neglect unforeseen circumstances and events. Even if you take care of everything before starting a business, you can run into a problem that you might not even have thought about.
The type of issue you face depends on the type of business you have.
For example, if you have a manufacturing business, your machines can malfunction or some event might cause your workers to stop working.
Ido Fishman gives the example of Coronavirus and its impact on businesses around the world. No one had predicted the coming of such a catastrophe.
Any event that you do not predict when starting a business has the potential of shutting your business down. You can never know how much the cost of recovering from the disaster would be. If nothing, you have to keep cyber attacks and privacy breaches in mind.
These breaches and attacks from cybercriminals have cost small and large businesses big time. It has to be mentioned here that large businesses can recover from such disasters because of their resources and some level of preparedness.
On the other hand, such attacks from cybercriminals often prove to be fatal for small businesses.
Ido Fishman advises that keeping funds for unforeseen events should be a secondary thought. The first thought should be to prepare for such circumstances. You do not want to prepare to recover from a ransomware attack for example.
Instead, you should have the right technological solutions to prevent such attacks from happening in the first place. Spend on prevention rather than recovering from a disaster.
#3. The Seasonal Down
It is common for young minds to think of innovative ideas. Today, people are busy thinking about new products, especially those that are somehow connected to smartphones.
Think about Food Panda, Uber, and Lyft for example. These companies are based on simple applications on smartphones. In a similar fashion, the young generation wants to come up with ideas to facilitate populations from around the world.
However, they ignore a lot of important details when coming up with new ideas. In many cases, their ideas are very seasonal i.e. they are great for a particular season but then go down in a different season.
Think about a business that targets people who buy Christmas Trees.
Well, you might have a huge inflow of money in the Christmas season, but happens after that?
Of course, you will have to see a huge gap of sales and income.
Just because your business does not make any money during the rest of the year does not mean you will not incur any expenses.
If you have workers working for you throughout the year, you will have to pay them and arrange for their benefits. In addition to that, you have to pay the costs of energy bills, rented spaces, etc.
If you are starting a business, you have to think about the seasonality of your idea.
Ido Fishman believes that there is nothing wrong with starting seasonal businesses. He believes that any business can thrive in today’s market only if its owners have the right strategies and plan in place.
According to him, the first thing that the owners of seasonal businesses have to work on is their profit margins.
You have to make sure that you keep your profit margins so high that the sales of six months help you cover the costs of the coming six months.
It might sound too good to be true but there are businesses running on this model already.
#4. Fulfilling Large Orders
Having a large order might seem like a great blessing, but it can prove to be a huge challenge for small businesses.
In many cases, small business owners are not prepared for large orders or sudden growth in other words. They are prepared for the daily grind that their business goes through.
However, when they receive a huge order from a large company, they do not have the funds in place to fulfil that order.
It can be the worst situation for any business.
So, you have an order from a large company and this order could change the course of your business. However, you just cannot proceed because you do not have enough capital to meet that order.
Again, Ido Fishman believes that no problem in the world is without a solution. According to him, businesses should already be prepared for big orders.
In addition to that, businesses that are providing the market with products should already have a perfect plan in place to arrange for extra funds.
For example, a small business should not be relying on a bank for its funding needs all the time. The other great options available to small businesses include invoice factoring, invoice discounting, angel investor funds, etc.
So, if you are thinking about starting your own business, you must be prepared for large orders as well.
Another situation that’s quite similar to receiving a large order from a customer is when your business experiences a huge spike in response.
So, you have run an ad on TV to get some attention from the audience. Luckily, your ad has clicked and it is raining calls in your call centre.
You did not prepare for such a huge inflow of calls and inquiries. As a result, your system gets overloaded. It freezes and you end up disappointing thousands of people who were your potential customers.
That’s a huge loss, especially after knowing the fact that your marketing campaign had succeeded.
#5. The Credit Customers
Believe or not, you are going to run into this problem no matter what type of business you are and how well you have prepared your business plan.
When you are a new business in the market, you have to focus on making new customers rather than earning abnormal profits. The idea is to convert a lead into a customer at any cost. To do that, you have to sacrifice a lot of your values.
For example, you might have decided to not do business on credit, but now you have to do it because many of your customers are only willing to try your product/service if you let them buy it on credit.
The issue with credit sales is that you do not get your money for a long time. Yes, you do not get your money even at the time your customers have promised. It is a usual thing in the business community.
You will always have a huge list of customers (mostly businesses) that will delay your payments.
What happens next is that your business starts to choke because of the lack of cash flow. You have to arrange cash to meet your overhead costs, fixed expenses, etc.
Is there a way to tackle this particular problem?
Of course, Ido Fishman has a perfect solution to this problem.
First of all, according to Ido, you have to create a system through which you can monitor your payments and invoices. Before you even encounter the problem of non-paying customers, you will run into the issue of not knowing who has paid and who has not.
Once you have the right system in place, you will always know which payments are due and which are not. After creating a system of invoicing, you have to look for backup methods that you can use when your business runs low on cash.
Discounting the invoices that have not been cleared is one way to do that. Other methods include approaching lenders that operate specifically for small businesses.
They have several loan options with requirements that are much more flexible than bank requirements.
#6. Accumulating a Cash Reserve
At first, you might think that running a business successfully is all about selling all your stock, getting all the money back into the business, and buying more stock for more sales.
Yes, this loop repeats for every business, but there is something additional that you have to do. That additional thing is called growth, which is compulsory for every business in the world.
How can you grow if your business is only meetings its expenses and paying you a salary at the end of the month?
What if you see the demand of your product increasing in a different area or region and want to open your business there?
For that, you have to accumulate a cash reserve. Ido Fishman believes that building a cash reserve is the most challenging thing for any business.
According to him, a business can only build a cash reserve when it has a fully-fledged plan in place.
In short, you need to calculate your expenses, income, and profit margins for the coming six months.
You will then have to base your calculation for the cash reserve on these calculations. More importantly, you will have to follow your plan strictly so you can build a cash reserve.
This extra stored wealth helps your business growth without requiring the help of a bank.
There is no business in the world that exists without challenges. When you start a business, you must also face these challenges. However, knowing them in advance should help you prepare with a plan.
In addition to that, you must always listen to advise from the experts of the industry to navigate smoothly through the thick and thin of business.
Ido Fishman is years of experience handling financial and investment matters and every word from him should be a pointer for you on your personal notebook to make your business successful.