The majority of small businesses will experience financing problems at some point during their existence. How well their management deals with these problems will go a long way to determining their ultimate success or failure. There’s an old saying in business; “Cash is king”, and so it is. There are many instances of businesses being profitable on paper only to be unable to sustain operations due to poor cash flow management.
The financing problems created by improper cash flow management are ranked high on the list of problems faced by business owners. In fact, the 2007 Small Business Survival Index ranks financing problems up on the list of small business problems along with taxes (which can create financial problems of their own), government regulation compliance, legal threats, and finding quality employees.
If your small business is experiencing financing problems, what can you do to solve them? You have several options. You can bring in more revenue, reduce expenses, or become more efficient at managing your cash flow. In most cases you would better served by doing all three. Let’s look at these solutions and how to achieve them.
Increasing revenue is certainly a worthy goal of every business, but may not in itself lead to a solution for your small business’s financing problems. This is because in many cases additional funds are necessary to support the larger operations that create the additional revenue. For example, if you have a contracting business, you’ll need more staffing to take on additional work, which will lead to a short term cash flow problem until collections catch up with your increased labor costs.
This can be seen for manufacturing businesses as well. As your business grows and production levels rise, your business will incur additional plant, equipment and labor costs to support the larger number of orders you’re receiving. Until your receivables catch up with your increased costs you will have financing problems.
This means that increasing revenue isn’t always a solution to cash flow problems,and can actually exacerbate them. Increasing revenue to solve small business financial problems is desirable in the long term, but will only help in the short term if the revenue increase can be obtained without substantially increasing costs or if your business operates on a chiefly cash basis. If you extend credit to your customers, the additional costs required to grow your revenue can easily lead you into a cash position that gets worse before it gets better.
What about reducing costs as a solution to improving financing problems? For most businesses, reducing costs, if it can be achieved without reducing revenue, or reducing costs associated with unprofitable revenue is of utmost importance. Not only do costs directly impact the bottom line, they can reduce the operating efficiency of the business, large or small. Traditionally the largest business expense is labor. While this rule isn’t always true, the majority of business owners can attest to the fact that labor costs are what keep them awake at night. The problem is reducing labor costs while protecting revenue.
The other cost that is especially troubling for many small business owners is taxes. In fact the American Institute of Certified Public Accountants (AICPA), who would be a position to know about such matters, ranked taxation issues as one of the three leading causes of small business bankruptcies. Reducing the tax burden by any legal means is vital to the long term success of your small business. This alone can reduce your financial problems to the point where cash flow problems disappear altogether.
Many small business use some form of financing to finance growth or smooth out the bumps in their cash flow picture. Weather the cash flow problems are caused by expanding operations, inefficiencies, or seasonal business cycles financing is another valuable tool available to the business owner to solve their cash flow issues. Financing solutions for small businesses are available in many forms, including lines of credit, loans, and additional investment provided through either equity or debt financing.
No matter what other problems you face as a small business owner, it’s clear that financing problems will always rank high on the list. How well you deal with these problems will determine the success or failure of your business.