Starting and keeping a small business is a tough battle to conquer. Most of the problems you’ll face stem from the financial situation of your business. If not resolved immediately, these fiscal issues might get out of hand to the point that it puts your whole operation in jeopardy.
That’s why it’s important to be prepared to settle such challenges to ensure the security and growth of your enterprise. If you own a small business or are planning to start one, then this article could help you understand the financial challenges you might encounter in the future.
Read on to know some of the most common financial problems that small businesses face, what you can do to prevent them, and how to save your business from absolute financial ruin.
Inconsistent Cash Flow
Ensuring consistent cash flow should be the top priority for any business. A fickle company income could lead to mishandled payments to employees and suppliers, eventually causing the business operation to go out of control. It may take a while to regain stability when this problem occurs.
That’s why small businesses need to keep a close eye on their cash flow. Effective invoicing and streamlining your payment acceptance process are two of the things you can focus on to properly manage your cash flow.
Improving customer engagement and cutting down on costs will also help maintain a positive balance in your revenue and expense stream.
Retaining and Growing Your Customer Base
To secure consistent revenue, you must first maintain and expand your customer base. If this isn't done, the company could lose hundreds of thousands — if not millions — of income. Losing your customers will also stunt your business growth and hinder your profitability aspirations.
Adopting various marketing strategies can help maintain and get new customers, and you can start doing so by creating a solid marketing plan. A marketing plan is a tactic that businesses use to organize, execute, and track their marketing strategies over a given period.
Carrying out this type of plan means you have to set aside a sufficient budget for marketing to ensure the success of your initiative and that your allotted fund is spent properly.
Poor Tax Compliance
Being a business owner means you’re subjected to different taxes, depending on the type of business you have. The problem with handling taxes as a business owner is that you either overpay or underpay the tax collector.
Paying too much means you’ll lose more of your income, but paying too little could put you on the wrong side of tax authorities. Either scenario will take a significant amount of time, effort, and money away from managing your business. The cost of compliance is also a big burden for small businesses.
One way you can avoid poor tax compliance is by knowing your tax obligations early in your business operation. Properly tracking your expenses can also help you reduce your tax liability. Additionally, paying and submitting the required reports on time will save you from having to pay penalties in the future.
Mixing Business and Personal Accounts
A mistake that many aspiring business owners make is incorporating their business accounts with their personal ones. Doing so leads to mismanagement of cash flow, spawns tax issues, and even affects your credit score.
This risky practice is also a red flag for auditors, since commingling your company and personal funds will make it difficult for authorities to determine if your business is a legitimate operation or a mere hobby.
You can avoid this problem by opening a separate business account that you can use to handle all your company-related cash flows. Creating a business accounting process will also prevent you from mixing your personal and company accounts.
Debt is a normal part of running a business, especially if you’re just starting. Many entrepreneurs even purposely take on debt to launch or grow their businesses. They use this borrowed money to pay for improvements, employee expansion, and other profitable assets.
However, borrowed money is not always handled with care. Some business owners make the mistake of running too many expenses on their credits or purchasing depreciating assets that are impractical for their business operations. Doing so can lead to bad debt that can impact the company’s net value in the long run.
It’s difficult to be debt-free when operating a business, but you can still minimize its levels by reducing costs where it’s applicable, building up your business brand, seeking investors, or consolidating your loans in a single payment.
Saving the Business
Running a business is a gamble; you either grow or get buried in financial woes, with crippling debt being the biggest perpetrator of this burden. It may seem that all hope is lost when this happens, but you can still save your business either by filing for bankruptcy or taking a debt consolidation loan.
There are two types of bankruptcy: Chapter 7 and Chapter 13. Filing for a Chapter 7 bankruptcy means you are no longer obligated to pay your existing debts in exchange for your nonexempt assets.
On the other hand, filing for a Chapter 13 bankruptcy means you’ll get to keep your property but must pay off your creditors through restructured terms of payment.
Meanwhile, debt consolidation means taking a new loan to pay off multiple debts from different creditors. This type of loan does not usually require collateral and has a lower interest rate since all your existing loans are combined into a single debt.
Choosing between filing for bankruptcy or taking a debt consolidation loan depends on your financial situation. If your credit score is high, it’s best to take on debt consolidation instead since this method will not affect your credit much. It’s also a practical choice if your financial situation is stable.
But if your debt burden is too high, it’s best to file for bankruptcy instead. Having an unpredictable income is also a factor that indicates the need for a bankruptcy filing.
written by Chatty Garrate
Chatty is a freelance writer from Manila. She finds joy in inspiring and educating others through writing. That's why aside from her job as a language evaluator for local and international students, she spends her leisure time writing about various topics such as lifestyle, technology, and business.
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