Many, if not most, small businesses will experience funding problems sometime during their lives. How well management addresses these issues will go far to determine the companys final success or failure. There is an old proverb on business; Cash is King, and so it is. There are many cases that companies are profitable on paper just for not being able to maintain business due to poor cash flow management.
The financing problems created by incorrect cash flow management are highly ranked on the list of issues faced by entrepreneurs. In fact, the 2007 Small Business Survival Index ranks funding issues in the list of small business issues along with taxes which can create own own problems, compliance, legal threats and finding qualitative employees.
If your small business has problems with funding, what can you do to resolve them? You have several options. You can earn more revenue, reduce costs, or become more efficient when managing your cash flow. In most cases you would earn better by doing all three. Lets look at these solutions and how they will be achieved.
Increasing revenue is truly a worthwhile goal for all business, but can not in itself lead to a solution to your small business finance problems. This is due to the fact that in many cases additional funding is required to support the major operations that generate extra income. For example, if you have a construction company, you need more crew to take on additional work, which will lead to a short-term cash flow issue until collections get your increased labor costs.
This can be seen for manufacturing companies as well. As your company grows and production levels increase, your company will get additional facilities, equipment and labor costs to support the greater number of orders you receive. Until your claims meet your increased costs, you will receive funding issues.
This means that increased revenue is not always a solution to cash flow issues and can actually exacerbate them. Increasing revenue to solve small businesss financial problems is desirable in the long run but will only help in the short term if revenue increase can be obtained without significantly increasing costs or if your company operates on a predominantly cash base. If you extend credit to your customers, the extra costs required to increase your revenue can easily lead you to a cash position that gets worse before it gets better.
How about reducing costs as a solution to improving funding problems? For most companies it is essential to reduce costs, if achieved without reducing revenue or reducing costs for unprofitable revenues. Not only do the costs cost directly on the bottom line, they can reduce the efficiency of the business, big or small. Traditionally, the biggest business cost is labor. While this rule is not always true, the majority of entrepreneurs can prove that labor costs are what keeps them awake at night. The problem is to reduce labor costs while protecting revenue.
Other costs that are particularly worrying for many small businesses are taxes. In fact, the US Institute of Certified Public Accountants AICPA, which would be a position to know about such issues, ranked tax issues as one of the three main reasons for the bankruptcy of small businesses. Reducing the tax burden with some remedies is crucial to the long-term success of your small business. This in itself can reduce your financial problems to the point where cash flow issues disappear completely.
Many small businesses use some kind of funding to finance growth or to cut back the shocks in their cash flow. The weather in the cash flow issues is caused by expanding operations, inefficiency or seasonal cycles. Financing is another valuable tool for corporate owners to solve their cash flow issues. Financing solutions for small businesses are available in many forms, including credit commitments, loans and additional investments provided through either equity or debt financing.