Financial Issues SMBs Often Face and How to Fix Them

When you’re running a small business, there’re so many things to work on simultaneously to expand your business. From sales to operations to HR, all these processes have to be developed at the same time to keep the growth prospects open. While taking care of all these operations, small businesses often end up neglecting financial issues like poor cash flow management, bookkeeping errors and mismanaged account details.

Let’s get an insight into what leads to these financial issues and how to fix them.

Poor Cash Flow Management

Image Credit: Scaling Up NZ

What is the Issue: Insufficient cash flow can have a significant impact on a business, as funds are necessary for the overall functioning. If profits are like food, then cash is like air. You can survive without food for a while but you can’t survive without air.

Poor cash flow primarily takes place when a company’s expenses outstrip its earnings. This might be due to low sales, obsolete inventory, or poor debt collection on trade receivables.

Poor cash flow makes a company vulnerable to insolvency, as it’s unable to pay suppliers, employees and creditors. It also affects the competitive viability as the can no longer compete with others due to the lack of cash. Not to mention, your company’s credit rating takes a nosedive when there are frequent defaults on long and short term financial obligations. Until your business finds a quick way to inject cash for operational costs, it can lead to early collapsing.

Viable Remedies: To improve cash flow, find ways that boost the cash generating capabilities of your company. For example, discounts and clearance sales to put away stagnant inventory can accelerate sales, increase cash flow and make stocking space free.

Further, debt collection on trade receivable should be prioritised to improve cash flow. Poor debt collection is a major pain-point for a lot of SMBs, and such a situation arises due to some loyal customers who don’t pay on time. You might be tempted to neglect such late payments to build “lasting relationships” but this will only hurt your business’ health. Your customers pay their phone bills on time, their monthly loan payments, etc. So, they are aware of paying for a service on-time and thus, sending a payment reminder isn’t an imposition. Use an accounting software to keep a track of payment dues. You can also use it to establish a clear and fair payment policy, and improve overall cash flow.

Premature Diversification

What is the Issue: Let’s take the example of a guy named Jerry who ran a business that dealt in restaurant POS software. As his business started off well, Jerry decided to expand his revenue streams and offer a retail POS system even though he had no experience in retail. His original company was still in its growing phase and hence, couldn’t afford to divert enough funds to support another product. But Jerry thought that he was ready for diversification. Alas, he wasn’t. The retail POS system demanded all his attention and resources, and the restaurant POS system business was left unattended. Subsequently, his once happy customers started complaining and abandoning his product, causing a significant loss of revenue.

Just to be clear, the above example isn’t real but most people have heard of businesses witnessing the same fate. Initial success often acts as a motivator for SMBs to expand and be bigger and better. Often, the quest to greatness leads businesses to expand their portfolio prematurely causing massive strain on their finances. Premature diversification causes financial strain and if the endeavour isn’t successful, it can end up becoming the primary reason for bankruptcy and business closure.

Viable Remedies: Diversifying is a mark of business ambition. Just to be clear, we aren’t against the prospect of being ambitious. Ambition gets things done and it drives people to achieve their goals. It’s great if you want to diversify your business but you shouldn’t do it without showing careful thought or judgement. Understand the kind of impact it will have on your existing business model and do a complete marketing analysis along with forecasting. Ask yourself if it’s the right time to do it or is there a good reason to take such a risk early on? Don’t jump on the diversification train just because everyone around you is doing it or because you want to be the pioneer brand. Remember, for a customer, it doesn’t matter who came first. What matters is, who serves their needs better.

The High Cost of Employee Turnover

Image Credit: Towards Data Science

What is the Issue: The cost of hiring and onboarding an employee is quite high. But, the recruitment cost is unavoidable in order to hire the best talent and get the best out of them. At the same time, it is equally important for small businesses to retain their new hires, as such companies tend to operate with a ‘tribal knowledge’ approach- each member of the tribe (in this case, the company) brings specific knowledge and expertise to the table. So, if employee leave, they take that knowledge with them, resulting in not just financial loss, but also the loss of expertise.

Viable Remedies: In order to encourage employees and keep them engaged at work, consider having a mentorship programme in place. A mentorship programme not only helps employees learn new skills and increase productivity, but also align them to organizational goals. This makes the employee more invested in the company’s success and thus, receptive to the idea of working there for a long time. A company should also invest in cross-training and personality development programmes for their employees.

Also, make perks, benefits, and flexible work schedules as the pillars of your company culture. These are important factors that candidates consider before taking up a job. Further, remember to recognize and reward the accomplishments of your employees to keep them motivated. A company’s efforts towards employees betterment count and help in building a sense of loyalty.

The Over Dependency on Manual Processes

What is the Issue: A lot of SMBs refuse to encourage the possibility of using software to improve various functions. They often give the excuse of higher operational costs, lack of infrastructure, and insufficient resources for investing in automation technology. SMBs assume that buying a software solution is equal to spending more, while the opposite is true. Most cloud-based software and automated solutions require an initial set-up cost and minimal upgradation costs later on.

Instead of using software solutions, SMBs rely on manual processes that requires more resources and time. Manual task handling also opens up the possibility of human errors.

Viable Remedies: By using automated solutions, the risk of human errors is reduced considerably. Such solutions help in making the overall functioning of an organisation smoother and more efficient. Additionally, most software tools require only an initial one-time setup cost and minimal monthly subscription charges. Further, tech-driven organizations can delegate employees into more meaningful tasks and get more out of them.

Wrapping Up

The conscious effort towards handling financial issues on time can bring a major change in how your small business operates. A smart financial approach is all you require to stay in the game and thrive continually.

Surjodeep Bose

A self-confessed pop-culture enthusiast, he loves everything to do with movies, comic books and travelling. Studied at Christ University Bangalore with a triple major in Journalism, Psychology and English, I have been working in content for the last 2 years.

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