Discover how to tackle the top financial challenges facing entrepreneurs, including inventory management, capital access, and tax compliance. With financial services designed for small and growing businesses, CoCountant can help you transform these challenges into opportunities for growth and stability.
Are you an aspiring entrepreneur ready to dive into the world of business ownership?
Well, it’s a thrilling ride, but not without its challenges.
Meet Jamie, for instance. She owns ‘Bean There’, a beloved little boutique coffee shop. Despite its popularity, managing its finances can be a challenge for Jamie.
“A particularly tough month hit me last quarter,” she recalls. “I got an urgent, unprecedented large order for an event and— to make things tougher—my espresso machine broke irreparably. I used my personal credit card to buy a new espresso machine, but since I wasn’t expecting this expense and had no retained earnings to fall back on, I found myself in a tight spot where I might not be able to pay my employees on time.
“When that happened, I seriously reconsidered my decision of quitting my job to start this small business,” Jamie admits, explaining how she juggled expenses like rent and payroll with unpredictable cash flow.
Jamie’s story is not unique. There are over 31 million entrepreneurs in America[1], out of which only half manage to make it past the five-year mark, and 82% of businesses fail in the first year. These are tough statistics to swallow, but it’s crucial to face these facts head-on.
Why do so many businesses struggle with financial management, though? More importantly, how can you ensure yours thrives?
According to a study by Skynova[2], 44% of startup founders fail because they run out of cash due to poor financial planning. Cash flow is the lifeblood of a business. Like blood must flow smoothly through veins to keep a body healthy, money must flow efficiently through a business to ensure its health and vitality.
This blog tackles these big questions standing in your way as a business owner by exploring the top five common financial hurdles that lead to cash flow problems and arms you with actionable strategies to overcome them.
Poor inventory management
In Jamie’s cafe, “Bean There,” managing inventory effectively is critical, especially given the nature of her business and the hospitality industry, where many food items are perishable.
Jamie’s cash flow is closely tied to how much inventory she keeps, how quickly it sells, and the accounting methods she uses.
Why does this matter? Because when Jamie invests heavily in perishable goods like milk and fresh fruit, she’s betting on consistent customer traffic and optimistic sales forecasts. However, when that traffic doesn’t materialize, she’s left with unsold stock.
This means her ready cash is locked into products sitting on shelves, unavailable for other critical business needs like expansion or unexpectedly large orders.
How to navigate this issue:
That’s how inventory management directly impacts the cash flow of such a business. When inventory is not managed effectively, it ties up cash, which is then unavailable for other essential expenses, putting the business at a disadvantage.
Inventory control involves meticulous planning and strategy to tightly align inventory levels with real-time sales data and customer demand. By optimizing inventory control, Jamie can free up cash flow, minimize waste due to perishability, and improve overall profitability. Effective inventory control ensures that she purchases only what is necessary when it is necessary, preventing overstock and understock situations that can severely impact her financial health.
Daily bookkeeping will provide Jamie with immediate insights into the financial impact of her inventory decisions, allowing her to adjust her strategy in real-time. Similarly, cash accounting will show how these decisions influence her business’s liquidity moment by moment.
Together with reconciliation processes and the generation of monthly financial statements, these bookkeeping practices ensure that Jamie’s inventory management contributes positively to her business’s cash flow and overall financial stability.
Lack of access to capital
Gaining access to capital is one of the biggest barriers to small business growth. A 2024 Goldman Sachs 10,000 Small Businesses Voices survey[3]found that 77% of small businesses were concerned about their ability to access capital, and an OnDeck survey[4] reported that 70% of small businesses had less than four months of operating cash on hand.
In response to financial challenges, a majority of small business owners tap into their personal funds (53%) and/or use cash reserves (51%) to maintain operations.
How to navigate this issue:
It’s obviously pretty common for businesses to need a little extra cash now and then. Whether it’s filling a gap in cash flow, stocking up on raw materials, or seizing a chance to grow, smart planning means arranging your financing before the need gets critical.
Let’s look at six main avenues for accessing capital:
- Venture funding: Ideal for young companies buzzing with growth potential.
- Private equity: Great for those ready to trade some equity for a cash boost.
- SBA-backed loans: These can be tough to secure and usually offer smaller amounts.
- Bank loans: Often hinge on having collateral and a track record of revenue. For small businesses, your personal credit and assets might also play a role.
- Friends, family, and personal savings: The go-to method for many, according to the Bureau of Labor Statistics.
- Business line of credit: Offers the flexibility that traditional loans don’t.
A business line of credit for a small business owner seems to be a strong option, but it’s important to consider it within the broader context of her specific business needs and financial situation.
If Jamie had a business line of credit as her financial safety net, she could have borrowed the necessary funds to replace her broken espresso machine without a hitch. Repaying the money as her shop made earnings would have smoothed out her cash flow problems, keeping her on solid ground without disrupting her business operations.
Here’s why a business line of credit could be particularly beneficial:
Flexibility: Unlike a term loan, a business line of credit provides Jamie with the flexibility to borrow only as much as she needs up to the credit limit. This means she can manage cash flow more efficiently without having to take out a large loan that might not be fully utilized.
Manageability: With a business line of credit, Jamie would pay interest only on the amount she borrows, not the full credit limit. This could make it a more cost-effective option compared to other types of loans where interest accrues on the total loan amount from the outset.
Reusability: As Jamie repays what she has borrowed, the credit becomes available again for future use. This revolving nature makes it a handy tool for ongoing, cyclical business needs like inventory purchases or emergency expenses.
Speed of access: Business lines of credit often offer quicker access to funds compared to traditional loans, which is crucial for covering unexpected costs or taking advantage of timely opportunities.
However, while there are clear benefits, it’s also crucial to consider potential downsides:
Costs and fees: Lines of credit can have various fees such as origination fees, maintenance fees, or draw fees. The interest rates may also be higher than some term loans, especially if the line of credit is unsecured.
Credit requirements: Obtaining a line of credit typically requires a good credit score and a solid financial history. For newer businesses or those with uneven credit, securing a line of credit could be challenging.
Discipline in Usage: Because it’s so accessible, there’s a risk of over-reliance which could lead to financial strain if not managed carefully.
Given these factors, while a business line of credit is a versatile and powerful financial tool, it’s best recommended as part of a broader financial strategy tailored to the specific needs and capacities of the business.
If your cash flow is generally predictable but occasionally disrupted by unforeseen expenses or opportunities, a line of credit could indeed be a wise choice. However, it should be used judiciously and with a clear plan for repayment to avoid accumulating debt that could stress her business finances.
Overlooking government and tax compliance
Running your own business, whether it’s an S corporation or an LLC, comes with a crucial to-do: taxes. Yep, those annual filings and other taxes come knocking at your door each year.
Now, dodging these taxes or even just missing a deadline? That’s a route you don’t want to take. Not only does it lead to penalties, but those fines can really stack up, disturbing your cash flow and making everything more expensive in the long run.
Did you know that filing your taxes based on inaccurate financial records can lead you into the murky waters of non-compliance and underpayment penalties[5]?
Strangely enough, it’s not just underpayment that’s an issue. Did you know that many small businesses end up overpaying their taxes?
But why does that happen?
Many small businesses overpay their taxes due to a lack of awareness about deductions and credits they’re entitled to, often stemming from limited knowledge of tax rules and regulations. While overpaying taxes might eventually lead to a refund, this situation ties up cash that could otherwise be used for crucial day-to-day operations, directly impacting the business’s cash flow.
How to navigate this issue:
Staying on top of your taxes not only helps protect your business’s financial health but also ensures that your hard-earned profits are available to manage cash flow problems effectively, keeping them where they belong: in your pocket.
Navigating this complex tax landscape can be daunting, but you don’t have to go it alone. Designed keeping small businesses and their challenges in mind, CoCountant’s tax advisory and filing services simplify your tax obligations, ensuring compliance and optimizing your potential savings. Our experts provide tailored tax strategies and proactive advice, helping you make informed decisions that enhance your cash flow and maintain financial stability.
Mixing personal and business finances
One of the most common problems entrepreneurs face is the inability to separate their personal and business finances. But it is important to understand that keeping separate accounts isn’t just good practice—it’s a must-do for any entrepreneur.
Mixing the two can raise eyebrows among government officials and potential investors because it makes it hard to see the true picture of your business’s cash flow.
Plus, if the IRS decides to examine your finances more closely, having intertwined personal and business accounts can complicate the audit process. And honestly, an IRS audit is something no business owner wants to deal with[6].
For Jamie, using her personal credit card to buy a new espresso machine during a business cash crunch exemplifies the risks involved. This decision, made during an urgent large order and amidst equipment failure, forced her to use personal funds unexpectedly, blurring the lines between her personal and business expenses. It led to a financial tight spot where she feared being unable to pay her employees on time.
How to navigate this issue:
Here’s how you avoid commingling of personal and business finances:
- Create a business account: Make it a rule to handle all your business transactions through a business bank account. This keeps your company’s money separate from your personal funds and makes your financial situation clearer and easier to manage.
- Use a business credit card: Charge all business expenses to a business credit card. This is a simple way to keep track of spending and will be a lifesaver when you need to identify tax deductions.
- Give yourself a salary: Rather than dipping into the business funds whenever you need money, set up a regular salary for yourself. This adds a layer of professionalism to your financial management and ensures your personal and business finances don’t mix.
Market competition
Entrepreneurs frequently face the challenge of breaking into markets that are already dominated by established brands. These bigger players usually have higher brand recognition, better resources, and strong customer loyalty, presenting a very high level of competition that can overwhelm and even scare new companies.
According to a report on startup failure statistics[7], one in five startups fail because they can’t beat out their competition.
This intense competition often compels new businesses to invest heavily in marketing and advertising efforts in an attempt to gain visibility and establish a foothold in the market. However, these expenditures can be substantial, leading to significant cash flow challenges.
For startups and small businesses, the need to allocate large portions of their limited budgets to compete with larger, more established companies can strain their financial resources. This is especially critical when economic conditions fluctuate, further complicating financial planning and stability.
In such environments, managing cash flow becomes crucial. Startups must not only fund their day-to-day operations but also invest in marketing campaigns that are both effective and economical. Balancing this can be particularly challenging, as underfunding marketing efforts may lead to insufficient market penetration while overspending could jeopardize the company’s financial health.
How to navigate this issue:
- Strategically plan marketing expenditures: Leveraging data-driven insights to target marketing efforts more effectively and avoid overspending. This helps preserve cash flow by ensuring funds are used efficiently.
- Monitor return on investment (ROI): Keeping a close watch on the returns of marketing campaigns can help businesses adjust strategies in real time to ensure they are getting the best value for their investment, thus protecting cash flow.
- Explore cost-effective marketing channels: Utilizing digital platforms and social media can often provide a more cost-effective means of reaching potential customers than traditional media, reducing the cash burden on the business.
- Diversify funding sources: Reducing reliance on self-funding by exploring alternative financing options such as angel investment, venture capital, or crowdfunding, which can provide the necessary capital to support strategic marketing without straining cash flow.
- Implement cash flow forecasting: Use detailed forecasting to predict when cash shortages might occur and plan marketing expenditures around these predictions to ensure liquidity is maintained.
The bottom line
Embarking on an entrepreneurial journey is no small feat. It comes with its fair share of financial hurdles. As you’ve seen through Jamie’s experiences and our exploration of common financial challenges faced by entrepreneurs, the road to success requires more than just passion—it demands careful financial management and strategic foresight.
Remember, whether it’s managing cash flow, securing adequate capital, ensuring tax compliance, maintaining clear financial boundaries, and adapting to competitive market conditions, each challenge also presents an opportunity to strengthen and grow your business.
At CoCountant, we’re here to support you every step of the way. From optimizing your cashflow to navigating complex tax laws, we help you keep your small business finances in excellent shape so you can focus on what you love: building your business.
Ready to steer clear of the financial challenges you face as an entrepreneur and towards a prosperous future?
