The Top 10 Financial Challenges Faced by a Small Business

Getting Paid On Time

Running a small business is no easy feat, and one of the biggest financial concerns that many businesses face is getting paid on time.

Late payments can lead to cash flow problems, affecting the ability to cover day-to-day expenses and making it difficult to invest in growth opportunities.

Fortunately, there are steps that small business owners can take to help ensure they get paid promptly, including establishing clear payment terms and deadlines, sending friendly reminders for overdue invoices, and offering payment incentives for early payments.

Taking the time to put these measures in place can help ensure that your business stays on track financially.

Managing Inventory

Inventory is often a major expense for a business and can be difficult to manage properly.

Proper inventory management requires monitoring and managing current stock levels, anticipating future needs, and ensuring that customers can access the products they want when they want them.

When inventory isn’t managed properly, it can result in overstocking, which can lead to cash flow problems.

Additionally, if inventory isn’t tracked carefully, you may end up with an excess of certain items and a shortage of others, resulting in a loss of sales.

To ensure your inventory is managed effectively, it’s important to have a system in place that can accurately track your current inventory levels and alert you when stocks are running low.

You should also work to anticipate customer demand and order the appropriate amounts of products ahead of time. Finally, make sure that you keep accurate records of all purchases and sales to help you better manage your inventory.

Inconsistent Cash Flow

Cash flow is the difference between money coming in and money going out, and any business must have a healthy cash flow if they want to stay afloat.

Poor cash flow has been cited as the biggest obstacle to small business growth in the UK by a 2016 survey.

For small businesses, there can be a lot of difficulty in maintaining a positive cash flow, as there may not be enough incoming revenue to cover the costs of running the business. Poor cash flow impacts your ability to pay a debt, buy new inventory, pay your staff, and lose contracts.

This can lead to financial strain as bills go unpaid and creditors come calling.

The best way to combat cash flow problems is by creating a budget and sticking to it.

Budgeting allows you to monitor your expenses and income, and plan for the costs that will be coming up.

Additionally, it’s important to create payment plans with vendors and customers so that payments are made on time and you don’t end up with unpaid bills. Also, make sure that you’re not overspending, as this can lead to serious cash flow issues.

Additional Credit Card Fees

Credit card fees are one of the most common financial challenges faced by small businesses.

Credit card processing companies charge merchants a percentage of each transaction made, which can really add up over time. Additionally, credit card companies will often charge additional fees for returned cheque, chargebacks, and setup fees.

All of these fees can put a dent in a small business’s profits, so it’s important to understand the terms and conditions of any credit card processing company you choose to work with. Negotiating fees and finding ways to reduce them is also an important step in managing your business finances.

Other things to keep in mind include the types of cards accepted, fraud protection, customer service and support, and the time it takes to process payments. Doing your research before committing to a credit card processor can save you a lot of time and money down the road.

Rising Employee Expenses

When running a small business, employee expenses are often a major challenge. With limited resources and funds, it can be difficult to manage salaries, benefits, and other related costs. This is especially true if you are just starting and don’t have the same level of capital available as larger corporations do.

It is important to have a clear understanding of all your financial obligations as they relate to employee expenses.

Create a budget for salaries and benefits and make sure it is followed. Negotiate with employees on any issues that arise, such as medical insurance or retirement plans. You may also need to consider making investments in employee development programmes and training initiatives.

Finally, if you are having trouble managing employee expenses, look for ways to cut costs without compromising the quality of service or product you offer. This may include renegotiating contracts with vendors or suppliers, negotiating better terms for goods or services, or looking for more cost-effective ways to hire employees.

No matter what strategies you use, it is important to keep track of all employee expenses to ensure the financial stability of your small business. With the right approach and careful consideration of costs, you can make sure your small business is well-equipped to handle the financial challenges of running a business.

Putting Aside Money for Rent

While some business owners are lucky enough to own their property, many small businesses have to pay rent on a monthly or yearly basis.

One 2022 study by Statista has forecasted that industrial real estate rents are likely to grow by 3.4 per cent per year in the UK. Meanwhile, office spaces can see their rents going up by 1.6 per cent.

This can put a significant strain on the finances of a small business, as rent can take up a large portion of their income.

To successfully manage rent expenses, small business owners should negotiate a favourable lease agreement and be sure to keep up with any associated fees such as insurance and property taxes.

Apart from that, it can be helpful to review your rental expenses regularly to ensure that you are not overpaying.

Not Knowing about Tax Deduction

Are you sure you are not paying too much in taxes?

Well, most small businesses might be overpaying on taxes just to avoid being penalised by HMRC for paying too little. And this can just add to your financial woes.

There are many acceptable ways you can minimise your tax bill. Becoming tax efficient as possible will help you expand your margins and improve your cash flow.

Here’s how…

• Check if you have deductible expenses in the form of office costs, travel, staff costs, marketing, financial outlay and running your premises.
• See if you need a claim relief by offsetting the losses against profits. For example, you can adjust the losses to offset the profit made in the future, thereby reducing the tax for the next year.
• Make use of tax reliefs for research and development, patent, employment allowance, and business rates.

It’s important to keep up to date with any changes in tax laws so that you’re compliant.

However, I suggest you opt for an experienced accountant or tax consultant to make the most of your tax deduction according to your business type. Also, refer to the official tax relief page of the UK government.

Paying Utility Bills

Utilities are a major expense for small businesses, and they can quickly add up. Utility costs can range from electricity and water to phone, internet, and other services that are necessary to keep your business running.

Over the years, the energy bills in the UK have become fourfold, adding to the financial burden of small businesses. The Bank of England expects the country’s average energy bills to rise sharply to exceed an annual £4,266 ($5,170) in early 2023.

Managing utility costs is essential for any small business to remain financially secure.

One way to manage your utility expenses is by researching the different providers and negotiating better rates.

It’s also important to ensure that you’re not overpaying for utilities or using services that you don’t actually need. Regularly auditing your utility expenses can help you pinpoint areas where you could be saving money.

Another thing you can do is to invest in energy-efficient technology.

This can be costly upfront, but the long-term savings on energy bills could outweigh the initial investment. In addition, some governments offer grants and incentives for businesses that invest in energy-efficient technologies, so be sure to research the options available to you.

Finally, be mindful of how much energy you use throughout the day. Turning off appliances when not in use and switching to more efficient lighting solutions are just two ways that can help reduce energy consumption and lower monthly utility bills.

By taking the time to understand and manage your utility expenses, you can ensure that they don’t become a financial burden for your small business.

Not Using a Budget

Let’s admit it.

Many new small business owners spend hours creating a budget only to toss it in a drawer and never look at it again.

No wonder they soon find themselves in a tight financial spot. They are likely to lose the track of their spending; fall short of their goals and risk their credit and above all end up with debt.

With a sound budget in place, you will be able to determine how much you can earn, plan where to use it, and identify the gap between your expectations and reality.

By creating a budget, they keep track of their finances and can ensure that all necessary bills are paid on time before unexpected expenses pop up.

Spending on Advertising

Advertising is an important strategy for any successful small business. However, it can also be a major financial challenge.

Many small businesses don’t have the resources or budget to advertise their products and services in the same way larger companies can. This can lead to difficulty reaching potential customers, and result in a loss of sales and revenue.

To overcome this challenge, small business owners should explore cost-effective options such as online advertising and social media marketing.

Additionally, networking with other local businesses to cross-promote products and services is also an effective strategy that doesn’t require a large investment.

By exploring these low-cost advertising solutions, small businesses can increase their visibility and reach new customers without breaking the bank.