Financial challenges faced by small businesses
It is said that at least 80% of all small business fail in the first year. Proper financial planning might mean the difference between becoming part of that 80% or being part of the 20% that survives. Smaller enterprises face unique challenges when it comes to managing their finances successfully.
The saying goes, it takes money to make money. The problem however that is often faced by small businesses is that they invest in products or infrastructure that will eventually benefit the business and bring in money, but that investment ties up money in the medium to long term. In the immediate future, short-term expenses like wages and day-to-day expenses pile up and need to be paid. Companies need to plan carefully, maintain lines of credit to cover shortfalls and if possible, set aside some money as a rainy day fund.
Careful budgeting may include some extra cash allotted to unexpected expenses, but it is usually not a huge amount. If something big suddenly needs to be replaced, such as a vehicle, or machinery or any other unforeseen events that necessitate big spending like a lease that needs to be renewed which usually requires cash for moving of offices or requires a deposit to be paid. The allocated cash will most likely not be enough.
Replacing key employees
While big companies usually have insurance on key employees, this measure of protection translates differently to small companies. When there are fewer employees, the loss of even one can stretch human resources to a larger extent. Suitable candidates to replace the employee, in order to enable staff to return to their own responsibilities at a full time level will be a costly expense – one seldom budgeted for.
Fewer options for financing
While larger companies can sell stock option or bands publically to raise funds when needed, smaller businesses can only rely on trade credit, bank financing and personal investment for financing. It is often also more difficult for smaller firms to obtain an extension of credit or an extra bond, as they have fewer equity to offer as security.
All businesses want to grow – it means more money. But a sudden big increase in a demand for certain products or services can stretch already limited financial resources to the brim. In fact, even signing one big new customer can mean that demand has double but that there is simply not enough money to deliver on that demand.
It is clear that extensive and well-thought out financial planning is crucial to ensure the longevity and even survival of a small enterprise. Microsoft Dynamix NAV is the perfect tool to help the small business owner ensure the financial health of his business.