Managing Small Business Finances And Risks: Identifying Problems, Risks And Solutions

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Managing Small Business Finances And Risks: Identifying Problems, Risks And Solutions

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Small businesses have the most to lose, which is obviously related to the nature of their very stature. It is so difficult to make one’s mark in any field today, in spite of so many opportunities being there to do so.

The problem is that while there is a massive opportunity today for small businesses, the competition is perhaps even more massive! That however, has never stopped anyone with a good business head on their shoulders from being successful.

The reasons that have stopped budding entrepreneurs from ever really getting past that “budding” stage, however, are almost always financial.

What Are the Specific Financial Reasons Why Small Businesses Fail?

Financial issues are pretty much almost always found to be a direct or indirect reason why so many small businesses fail every year in the US and abroad. Do keep in mind that it’s a myth that most small businesses fail, but there’s truth to the fact that a significant number of them do end up going bankrupt.

Taking a look at those financial reasons which bring about their tragic falls will help us both understand and avoid those problems intelligently. It’s the first step of our risk assessment strategy here.

  • Insufficient capital
  • Poor reinvestments of the investor’s money
  • Miscalculated estimates regarding production costs and supply chain logistics
  • Poor budgeting
  • Inability to maintain a steady flow of cash
  • Undermining the importance of professional money managers; FRAs, CFAs, and CPAs are in such a high demand for a reason
  • Unsustainable growth plans; growing too fast without a Plan B in place
  • Absence/loss of sales
  • Mismanagement of employee pay scales
  • Paying for unnecessary or cost-ineffective services
  • Purchasing things that could have been rented or leased; machinery, equipment and the place itself
  • Inadequate number tracking in regard to sales, revenue, expenses, profits, taxes, etc.
  • Poor debt management
  • Unforeseen expenses and lack of emergency funds

Financial Issues are Often Interrelated and Chain Linked

As you may or may not have noticed, many of the problems here are interrelated, which is quite a significant observation for very practical reasons.

It has been found that businesses don’t generally fail on account of just one or two mistakes, although that is known to happen. For a large majority of the SMEs which do not make it, the financial reasons are often not just multiple, but interrelated as well.

The following should serve as a good example to explain how it often plays out in a chain-linked fashion:

  1. A new venture gets started with a highly prospective idea, but insufficient capital
  2. The insufficient capital makes the owner undermine the need for professional finance management
  3. This leads to poor budgeting and poor emergency planning
  4. Errors in estimates lead to a loss of cash flow
  5. Cash flow deficit reaches levels where operating the business is no longer feasible
  6. This leads to heavy debt
  7. A lack of financial expertise to guide the entrepreneur leads him/her further down the rabbit hole, on account of inadequate debt management
  8. The accumulating financial pressure of an unsustainable business plan + the crushing debt leads to bankruptcy
  9. If the entrepreneur did not register as an LLC or Corporation, the Sole Proprietorship stricture leads to personal bankruptcy as well
  10. The startup is gone and the rising entrepreneur is now labeled as a failure on multiple accounts, often unfairly so

This hypothetical scenario is quite common, unfortunately, and it’s just one of the many possibilities. Therefore, in order to avoid a domino effect, we need to be careful with our risk assessment and financial management from the very first day of the planning stage.

Now that certain major financial threats and mistakes have been identified to some degree, it is time to assign the necessary solutions and steps that begin with common business sense but go far beyond that.

Hire a Financial Expert or Get Your Own Degree

As illustrated in our hypothetical scenario, the whole problem arose from a singular problem, which can be identified as lacking a money management expert who needed to be there right from the planning stages.

If there was a financial expert involved or the entrepreneur had his/her own MSF degree to rely on, it would be possible to avoid all of the problematic scenarios quite effectively.

  • Not only would the budget and the capital be estimated properly, but there would also be plans for investor procurement as well
  • Accurate risk vs gain assessment will be possible for intelligently reinvesting the acquired funds
  • Production cost assessments would not be inaccurate either
  • The sound budgeting, estimations, and financial planning will minimize/manage/eliminate cash flow issues
  • Business loans are an inevitable part of launching and expanding business, but sound debt management is an intricate part of financial experts do
  • Sustainable growth or intelligent downsizing, if and when necessary will be estimated in advance
  • A CPA in charge of the pay scale management will be able to identify overpaid employees and suggest pay cuts accordingly
  • A Certified Financial Analyst (CFA) will easily be able to predict unnecessary expenses, concerning both services and purchases
  • Tracking sales, revenue, expenses, profits, and taxes is pretty much what professional financial reports are all about
  • Glimpses into the financial future; financial analysis and data interpreted predictions regularly reveal unforeseen expenses before they even appear

Therefore, the most important step is obvious, and it can be taken by either hiring financial experts from the planning stage, or by getting your own MSF degree. The latter option would be perfect for entrepreneurs who:

  1. Don’t have the budget to accommodate highly paid financial experts right away
  2. Are leaders who like to stay in charge of their own finances
  3. Already have an academic background in accountancy or finance
  4. Want to keep a highly prospective career path open on the side

Not only does it significantly increase the chances of success by eliminating some of the most common reasons for startup failure, but the degree also opens up a whole new avenue of lucrative career opportunities.

To provide some context regarding the kind of job opportunities we are discussing here, consider the average yearly pay for CPA and FRM professionals in the US.

  1. Financial Risk Managers (FRM) were earning $127,990 per year on an average, even back in 2018
  2. Certified Financial Analysts (CFA) on the other hand, can easily earn more than $91,000/year on an average, even while working at an entry-level job

As you can see, there is a reason why small business owners often cannot afford to hire them!

Which Path is Right for You: FRM vs CFA

Suffolk University’s official website provides clarification regarding the whole FRM vs CFA confusion, and it provides all the necessary details regarding how their Master’s in Finance (MSF) program can help students get started on the path to attain either of the two highly coveted designations.

If becoming an entrepreneur with sound knowledge about business financials is your prime objective though, the MSF program alone is sufficient for that part.

It will teach you to expertly handle most of the usual financial problems that small businesses are often faced with. However, if you wish to sit for CFA or FRM exams to facilitate career growth, visit the aforementioned website to know more.

The Basics of Smart Financial Management

Common knowledge is not as common as it should be, but the following few examples should help small business owners manage their general finances with greater efficiency than most:

  • Don’t opt for sole proprietorship, an LLC is just a superior option for small business owners in every possible way
  • If you don’t have the budget to hire an accountant or to do the taxes yourself, at the very least consider outsourcing it
  • Pay yourself no more than 10-20% of the profits initially; the rest will be useful for the emergency fund aka, Plan B
  • Legal expenses are inevitable, so work out a plan that makes it more feasible; you are not fighting a lawsuit, so a cheaper lawyer is a perfectly credible option
  • Download the minor business documentation templates to further reduce legal expenses
  • Rent and lease, don’t buy; buy only when renting expenses come too close to the purchase price within the very first year
  • Personal expenses should be kept to a minimum during the first year
  • If you cannot properly calculate and estimate the financial parameters of an expansion, don’t expand yet

This was a brief discussion created with a simple approach, mainly in order to help SMEs avoid making major financial errors and to direct them towards financially sustainable business management.

While knowing these outlines will help for sure, adequate actions and steps as suggested will also need to be implemented before the problems actually begin to pop up, one after the other.

Preventive measures are key here because, as already mentioned, small businesses have the most to lose. You may not be able to prevent toppling over if the precautions are not in place to prevent that domino effect from spiraling towards the road to bankruptcy.

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Managing Small Business Finances And Risks: Identifying Problems, Risks And Solutions

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