Remember having exceptionally vivid dreams as a child?
Maybe the one where you were standing in front of the class to give a presentation, but you couldn’t remember a word of what you were supposed to say? Or maybe the one where you are trying to run away from the bad guy, but you are running slowly, comically so?
Those types of dreams always made me pop up out of bed, panting for breath, unable to go back to sleep.
And while I am happy to say that I am no longer running through molasses to escape the unnamed, faceless bad guy, these vivid dreams have shifted to thoughts about my business. Conversations with my fellow entrepreneurial clients have confirmed the same thing; we all, on occasion, wake up with incredibly realistic (and often worrisome) thoughts about the state of our business and the stresses associated with it.
Entrepreneurs and business owners have to manage a thousand plates all spinning in the air at the same time, from business development to accounting to inventory management to strategic planning. In this blog post, we discuss five common financial stresses facing business owners and how to solve them to free up precious time that can then be reinvested back into your business.
1. Lack of Cash Flow
We tell all of our small business clients that cash flow is the lifeblood of your finances. A short-term cash crunch can upend even the best business plan. Unfortunately, having full mastery over cash flow often feels like an unattainable goal. According to the 2019 Small Business Trends report from Guidant Financial, 33 percent of small business owners surveyed cited a lack of cash flow as their greatest challenge.
There are steps you can take to even out the lumpiness of both your receipts and outflows, however. You can try to stretch out your purchase timelines (without pushing too far to affect your credit, of course) and shortening the time it takes to get your invoices paid.
Try cutting the time window for when clients and customers pay your invoices. If your typical terms require payments in thirty days, try cutting it to fifteen. Give existing customers ample time to adjust, of course. Further, implementing automated payment processes can lessen the number of “I forgot” missed payments.
On the expense side, you can ask your vendors and suppliers to adjust their payment due dates. They may or may not want to play ball (they are managing the same cash flow headaches on their end, mind you), but it’s worth asking, particularly when you are a consistent customer yourself. You can also make payments on the last possible day and use your business credit card to pay the invoice. Depending on your billing cycle, this may buy you an additional month (or longer) before the cash actually leaves your account.
2. Access to Capital
If cash flow is consistently the top stressor for small business owners, then (access to) capital is a photo-finish second place finisher. Having adequate access to capital is necessary to grow your business and achieve some economies of scale. Plus, you need to keep an eye on something other than the myopic management of cash inflows and outflows.
Unfortunately, capital can be hard to come by. According to Biz2Credit’s May 2018 Small Business Lending Index, big banks only grant about one in four small business loan applications. A well (or sinkhole) of other nonregulated capital providers have popped up to fill the funding gap, but the terms of these loans and products can be financially ruinous.
So how can small business owners better access capital on business-friendly terms? It all starts with credit, your personal credit and the credit of your business. According to Nav’s Small Business American Dream Gap Report from 2015, 20 percent of business owners who applied for funding in the last five years were denied. Further, 82 percent of all the business owners surveyed didn’t know how to interpret their credit scores. The research report also showed that individuals who have a better understanding of their business credit score are 41 percent more likely to be approved for a loan.
3. Business Budgeting
Budgeting as a word/idea/process always gets a bad rap. I’ve tried to use “spending plan” as a replacement term in conversations with clients but it hasn’t quite caught on.
No matter what you want to call it, though, planning ahead on the expenses you need to build, run, and grow your business is critical. Without knowing your future needs, how could you possibly implement a viable business plan? How could you set your pricing, or target a profit margin, without knowing the all-important other side of the ledger?
We often go through a spending review exercise with our clients, both on the personal and business sides of their lives. It’s illuminating, though sometimes the glare is harsh. We often hear refrains like “I spend how much on subscriptions last year?” or “Why was our travel expense so high?”
Clients become much more amenable to building a spending plan and committing to a periodic review after seeing how quickly cash can slip away unintentionally.
4. Unforeseen Expenses
After expounding the virtues of a budget, I am going to point out its one fatal flaw: a budget can only track known, or expected, expenses. Fine-tuning your budget (a great way to better manage your cash flow) is well and good, but an overreliance on the final product can leave your business unable to deal with unexpected outflows.
Did that piece of machinery conk out after warranty but before you planned on replacing it? Did an employee leave unexpectedly, requiring you to devote time and financial resources to finding and training a replacement?
These aren’t theoretical concerns. In a 2018 small business accounting survey from Clutch, 35 percent of small business owners cited unforeseen expenses as their main financial challenge.
And while there is no panacea solution for these abrupt needs, that doesn’t mean we can’t do our best to protect our future financials. We highly advocate for emergency funds (both at the personal and business levels) to protect against the unknown. Further, some insurance products may help with catastrophic costs, though that discussion needs to be highly individualized, so consult with your financial and legal advisors before proceeding.
5. Inadequate Money Management
Trick question: would you rather meet with a new prospect or spend that hour inputting accounting entries in QuickBooks? The answer is obvious — do both!
We aren’t advocating cloning yourself (though we all may wish we could on those particularly busy days) but instead are recommending that you better leverage your time so you put it to the highest dollar usage. Meet that prospect and outsource/hire for your bookkeeping, accounting, and other nonrevenue-generating needs.
Don’t let your business’s financial life hinge on a box of old, coffee-stained receipts. The minute cost of paying for professional business money management and accounting will pay for itself several times over. Are you aware of all the small business tax breaks or strategies to maximize, for instance, your qualified business income (QBI) deduction? If you had a windfall year, have you considered setting up a cash balance defined benefit plan or nonqualified deferred compensation plan?
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This year has seen more than its fair share of stresses, financial or otherwise, and small business owners have been hit particularly hard. But there are ideas you can implement today to lessen your burden and get your business back on course. If you would like to learn more tips on how to lessen the financial stresses of being a small business owner, sign up for our newsletter.