Starting a business can be hard enough, but maintaining it can be even more difficult. New businesses will encounter a wide variety of issues that can be unique to themselves and their situation, or common in areas such as taxes. Unfortunately, the majority of small businesses fail within their first three years for a variety of reasons and we will look into some of the financial issues below.
They struggle to stick to their budget
The first few years of running a small business can be tough as you are essentially navigating new waters. You can only prepare so much for how the market is going to react to your product or service and like anything in business, nothing is guaranteed.
While a small business will have an idea of what their expenses are, sudden, unforeseen circumstances can have a detrimental effect, especially on their budget. The current spread of coronavirus is a prime example. Those ordering goods from China will likely not have expected there to be a delay in deliveries because of this, and this is very difficult, or even impossible, to predict. The best they can do is create enough of a buffer and have a back-up plan to alleviate this stress if it occurs.
There is a lack of cash flow
Starting a new business inevitably means you will have low cash flow. As each transaction and even seasons are likely to be different, a young business will have to learn and adapt to these, and the only way of doing so is learning over time. The last thing you want is to be short on the day you have to pay your rent, wages and other bills, so it is imperative that the business looks to have payments coming in consistently.
Consider incentivising clients and customers that often pay late, to pay sooner, and request suppliers to extend their payment terms. This, obviously, is just a short-term solution and should not be thought about when considering the longevity of a business.
Shortage of capital
Ideally, a business should be targeting growth and not just be satisfied with just surviving. However, with a shortage of capital they may struggle to do this. It is needed to invest in areas such as new machinery, hire labour, research and development, or even purchasing other businesses. A shortage of capital can be tied to a lack of cash flow, with both being almost as bad as each other.
Costs of marketing
So you may have spent the majority of your cash on creating one of the best booking systems on the market, but you failed to allocate a budget to market it. This is a common problem with young, small businesses, and often they tend to underestimate how much they need to spend in such areas. Online marketing can be very competitive in many areas, and therefore expensive to run ads. Not only is that an issue, but spending money on a high-quality ad can also be problematic.