Running a small business is one of the hardest jobs there is. The responsibility rests entirely on you and your colleagues. You must learn to successfully juggle the intricacies of keeping the business afloat while still maintaining a healthy work-life balance. As a small-scale business owner, it can seem like you are constantly in a battle as your mind is never at ease regarding your future in the business.

Perhaps, the most daunting challenge that small business owners face is financing. The fact that a small business owner must maintain the longevity of their business while not forgetting about their employees and simultaneously keeping up with the current marketing costs can seem like an impossible factor that many entrepreneurs fall short of. However, this does not have to be the case. Staying on top of the game when it comes to finances is a key area that, if done right, will guarantee your small business' success. This article explores the various financial challenges small business owners face in 2022 and the best strategies to overcome them.

Financial Challenges faced by small businesses

There are several financial challenges that small-scale business owners are faced with in the current state of the business world. Here are the top 9 Challenges that small businesses face in 2022, along with valuable tips to solve these common challenges and ensure that your business is profitable and maintains a competitive edge:

Lack of adequate funding

Lack of adequate funding has been cited as a major "crisis" or 'financial hindrance" by most small business owners. The reason for this is simple; small businesses lack funding to acquire critical assets that they need to continue being operational while still having enough capital to invest in bigger projects and focus on long-term growth efforts. Recent surveys indicate that only around 5% of small businesses that apply for funding yearly receive the capital they need to remain afloat. Denial of business capital is often attributed to poor company credit score ratings.

To remain competitive in the market, small business owners are often forced to look for alternative funding from private lenders who sometimes charge very high-interest rates that make it difficult to pay off the loan promptly. This can cripple the overall financial health of your business. Moreover, getting funding from these alternative sources is not always guaranteed. Therefore, it is essential that you are aware of the various funding sources available to small business owners and evaluate all the possible funding options before choosing one that is right for your business. These alternative sources of funding for small business owners include:

  • Venture funding
  •  Small business grants
  •  Individual investors
  •  SBA-backed loans
  •  Private equity
  •  Strategic asset financing
  •  Bank loan financing without government backing
  • Getting business funding from family and friends
  •  Self-financing using personal savings.

In addition to choosing the right funding resource for your business, you can improve your chances of securing business funding by taking into account the following useful tips:

  • Make sure that you have a better understanding of your business credit scores and consistently work to improve them
  • Always have a well-written business plan and a clear business strategy in place before you apply for funding
  • Be prepared to present your company in the best possible manner by ensuring that your financial statements are updated, accessible and auditable at any time. Other than that, do proper research and make sure that you know the market trends that could impact your business trajectory.

Emergency expenses

Small business owners have the tendency to take on more than they handle in a bid to achieve their business goals. However, this can be detrimental to the long-term stability of their business as they will often end up being unable to cover their predetermined expenses and business obligations. Furthermore, if unforeseen events such as natural disasters or economic slowdown occur that may lead to a financial crisis, then the resources they initially put into their business may not be enough to recuperate from the situation.

Developing a comprehensive and realistic small business budget for your business and sticking to the laid-out budget is greatly recommended. This will allow you effectively manage your company expenses, make the best use of available resources, and prevent the onset of a financial crisis. A well-formulated budget will also empower you to make informed decisions when it comes to allocating resources, meaning that you can create and maintain financial flexibility.

To ensure that your small business budget is working effectively, consider updating it regularly to reflect your current business financial situation and reference it when making major financial decisions. Your small business budget should include fixed costs, variable costs, a detailed cash flow statement, and your safe-to-spend amount/profits. Your budget must also include a contingency fund that can cover unforeseen expenses before they have the chance to harm your business seriously.

Lack of proper reporting

Documentation is critically important to any business. Keeping accurate records of every transaction will ensure that you can track data and target goals easily and make it easier for you to monitor financial performance. However, if your business lacks the necessary systems and processes to maintain its financial records efficiently, you're likely to incur unnecessary expenses due to a lack of proper documentation and reporting.

Generally, private companies are not required to report their yearly financial data, but poor book-keeping systems can lead to operational inefficiency and other serious problems. For example, misstating revenue on tax forms and improper deductions may result in your business being audited and penalized for tax fraud claims. Depending on your business' location, late reporting of your financial data may also result in fines and other penalties.

To avoid such scenarios and possible financial losses, the use of automated reporting systems such as ERPs (Enterprise Resource Planning) and CRMs (Customer Relationship Management) is highly encouraged. Using automated reporting systems will allow you to easily compile and analyze your company's data, process payments, and manage transactions. These systems have numerous benefits, including making it easier for you to track the performance of your employees, reducing processing time, and eliminating data entry errors. Most importantly, these systems are designed to be flexible enough that they can be tailored according to the needs of your business.

Debt repayment issues

Small-scale business owners who go through bankruptcy do so because they cannot repay the debts they have accumulated to aid them in running and expanding their business. The lack of capital can make it difficult for small business owners to purchase the necessary resources to run their business effectively, but taking on too much debt or acquiring loans from lenders that charge high-interest rates can have drastic short and long-term impacts on the company's operational success.

To avoid such financial crises, you must learn to control your business debt levels and manage your outstanding debts effectively. To achieve this, make sure that your business does not rely too much on external financing, particularly bank loans and other traditional forms of debt financing, as this can be very risky. If you have to take on debt, consider loaning from reliable and trustworthy financial institutions that charge considerable interest rates. Also, consolidate your business loans into one payment to enable you to reduce your monthly costs without negatively affecting your business.

Other tips to help you minimize your debt levels include identifying areas where you can cut some of your expenses, for example, subleasing unused office space, outsourcing or reducing the number of employees, or selling excess office equipment and furniture. You can also consider acquiring business capital from creative financing options such as crowdfunding, peer-to-peer lending, angel investors, and accelerators. Lastly, if you encounter a financial crisis that may render your business unable to make timely debt repayments, contact your creditors to negotiate an acceptable repayment plan that will favor everyone involved.

Inconsistent cash flow

Proper cash flow management is essential to ensure that you can make timely payments for the business. The constant fluctuations in income and expenses can greatly affect the stability of your business. To get a better sense of your company's cash flow, you should establish a cohesive monthly budget and track it during the month. A monthly budget should include fixed costs, variable costs, and revenues to track how much cash is flowing INTO your business versus how much money is flowing OUT of the business. The important thing to consider when budgeting is that your income and expenses should be in line, and you should have 'left over' cash to cover unforeseen business costs.

However, if this is not the case, and more cash is flowing out of the business than it is flowing in, you must find ways to boost your cash flow. Common methods for quickly boosting a business' cash flow include better management of your account receivable balances by maintaining stricter credit policies, promptly collecting all outstanding payments, and negotiating payment plans with your clients.

Another valuable tip for generating more business revenues is better management of your inventory. Make sure that your inventory levels match your customer demands. Besides, develop and implement a proper cash flow management system that allows you to determine your business's total sales, purchases made, money owed to you, and the bills you need to settle. You may also need to calculate your free cash flow, which translates to your business profitability margins. To effectively manage your business' cash flow, it is important that you develop a comprehensive reporting system such as a supply chain management software or an ERP system that can help you constantly keep track of your business's key financial information.

Taxes and government compliance difficulty

The Internal Revenue Service (IRS) is one of the government bodies that primarily oversee tax compliance, and failure to comply with the IRS's tax requirements can result in penalties and hefty interest rates. Failure to meet state tax filing deadlines may also result in penalties imposed by your local and state governments. Considering these factors, it is imperative that you learn to adequately complete any business tax return and other government forms on time to avoid compliance issues and incur unnecessary costs. It is also important that you have a proper understanding of all your business's taxes and their requirements.

Mixing business and personal expenses

When running a small business, your finances can easily become intertwined with the finances of your personal life. If a business owner has no clear separation between personal and business expenses, there is a high risk of losing control of financial decisions that may negatively affect the latter's tax filing status or investment decision-making.

To avoid such risks, it is essential that you make it a point to separate your business finances from your personal finances. You can accomplish this by opening a separate business bank account, setting up a small business credit card, and maintaining separate personal financial accounts. It is also important to separate your business and personal expenses as carefully as possible. For example, you can only purchase business-related items on your business credit card, preventing personal expenses from being charged to the card. Also, keep detailed records of all your business's expenditures and maintain accurate financial records to avoid committing any tax-related errors.

Employee retention

Employee retention is a key factor that can determine your small business's future success or failure. Your business has to make sure that it offers competitive salaries and benefits and good working conditions to attract and retain competent employees. You should also be able to offer your employees career advancement and professional growth opportunities, or else they will exit your company for more lucrative job opportunities with other companies.

As a small business owner, attracting and retaining top-qualified employees at an affordable cost can be very difficult since you have to compete with larger corporations that have numerous advantages over your business. Nevertheless, you can still maintain healthy and effective employee recruitment and retention programs by utilizing the following valuable tips:

  • Ensure that you have a selection criterion that ensures that job applicants are a good fit for your business before hiring them. This will help avoid incurring the costly expenses associated with frequently hiring and onboarding new staff every time a new hire fails to meet your company's expectations.
  • Offer your employees higher compensation to prevent them from leaving the company
  • Implement work-life balance policies that allow your employees to work manageable hours and have time for personal commitments
  • Maintain open communication lines between the managers and employees to allow for staff feedback and improve operations
  • Offer your employees career advancement opportunities, if feasible
  • Motivate your employees as much as you can using various incentives such as bonuses, job promotions, team awards, company recognition, salary increases, etc.

Investing in marketing and advertisement

As a small business owner, it is important that you invest in good marketing and advertising strategies to help promote your business. Your business will be competing with other businesses in the same industry, which means that you should have a sound knowledge of how to advertise your business online and offline.

Since your financial resources are limited when compared to larger corporations, you should learn how to effectively market your company and promote its products or services on a budget. To help you effectively market your small business, consider advertising through the following cost-effective strategies:

  • Utilize an effective online marketing strategy that uses a variety of mediums such as social media, online advertising, and search engine optimization to promote your business's identity and services to potential customers
  • Utilize relevant adverting platforms that display your products or services in areas that are frequented by your target audience
  • Utilize effective online advertising such as display ads, text ads, radio or television advertisements, and direct mailings.
  • Create business cards that include your company information and contact details.
  • Maintain an active presence on all the key social media networks, such as Facebook, Twitter, Instagram, etc., to create awareness of your business among many potential customers.
  • Monitor all the relevant online content that may affect the reputation of your business and make sure that you are not linked to any negative content.
  • Employ some tactics to advertise your business, such as word of mouth.

Conclusion

Small businesses are an integral part of a society's economic development. Small business owners are responsible for generating a significant percentage of a country's total employment and contributing to the overall financial growth. However, the success of a small business largely depends on the owner's ability to make sound financial decisions and implement simple techniques and strategies that can help overcome potential financial risks, boost growth and guarantee business profitability and sustainability. By following the effective financial management techniques and strategies outlined in this article, you can avoid some or all of the common financial challenges that small business owners face today while positioning your company for success in the marketplace.