It’s a great time to be a small business owner. But that doesn’t mean it’s easy. There are always challenges, and some become even bigger during good times in the economic cycle. Right now, people seem to be bouncing between wildly optimistic - The Bank of American Hispanic Small Business Owner Spotlight for 2018 finds that 87% of Hispanic business owners plan to expand their business in 2019 – and a little nervous that we’re due for a business slowdown or perhaps a mild recession. That means current challenges need to address planning for growth as well as protecting your business against a downturn. Here’s the top issues that small business owners face right now.
The unemployment rate is low, which means your best employees have a world of options. Small businesses struggle to match the benefits bigger companies provide, so figure out what you can offer – flexible working schedules, family culture, mentorship, loyalty, willingness to be innovative and take risks – that larger businesses don’t. If nothing else, make sure you aren’t imposing all the drawbacks of corporate culture with none of the perks.
Diversified customer base
There’s something to be said about targeting your offerings to a very specific market, but make sure you are diversified within that space. If you sell products in a brick-and-mortar shop, for example, make sure you’re selling online as well and vice-versa. That way, if your site goes down or road construction blocks access to your shop, you still have another stream of income. Also, diversify your product range, particularly if you are selling very trendy items. And if you offer services instead of goods, make sure your business does not primarily rely on one customer. You need to have enough customers to survive if one or two take their business somewhere else.
As your business becomes more successful, everyone will tell you it’s time to grow (including our advice directly above telling you to diversify!). You do need to grow to remain strong and competitive, but don’t grow too fast. Remember to keep the same level – or better – of product/service quality, customer service and whatever else you’re known for – creativity, imagination, attention to detail, accessibility. In some cases, it may be better to raise your rates/prices than to spread yourself too thin.
The more successful you are, the harder it will be for you to enjoy your success. As a small business owner, you know you’ll be working more hours than people who work for other people. There’s no way around that in the first years of building your business. But when you are established, figure out some way to take time off – weekly as well as chunks of vacation time. Yes, you might lose a little money but your customers and clients are almost certainly taking time off and should understand that vacation time is a necessity. Plan your vacation/days off to your business cycle, and if you have clients that are really dependent on your services make sure to give them a few weeks advance notice.
For many small businesses, managing cash flow is a real challenge. You either have plenty of money coming in, or none – there seems to never be a happy medium. So, it’s no surprise that, according to a U.S. Bank study, 82% of businesses that fail do so because of cash flow problems. The good news is that this problem becomes somewhat more manageable the longer you are in business Eventually you do get a feel for when your business will be slow, and when you can expect a lot of activity, and plan accordingly. But be aware that issues like unusual weather, other business activity (such as a strike in the transportation system), natural disasters (and not only in your immediate location), the overall economy, unpredictable events (such as the Zika virus scare in 2017, which had a huge, detrimental impact on Miami’s tourist-dependent small businesses) and many other factors – can skew your business cycle. In our interconnected world, a typhoon halfway around the globe can directly impact your business. There’s not much you can do about this, having enough working capital to see you though slow times.
Even more frustrating is when you have a lot of money coming into the business, but you can’t access those funds because you are waiting for clients to pay their invoices. While the correct solution to the “waiting for payment” problem is eventually going to be “fire the clients who always pay late” in the short term a cash advance on those invoices may be your best option to keep your business afloat.
Understanding Working Capital
You need to have enough – but not too much – working capital on hand. Too much means you’re not putting your money to work for you. Too little means your business may be in trouble.
Working capital includes the money you have in the bank and any assets that you can quickly liquidize into cash such as inventory and accounts payable. As a basic business process, you should calculate the ratio of your working capital to gauge your business’ financial strength. You do this by adding up your assets, and then dividing that number by your liabilities. As an example, let’s say you have $50,000 in ready cash and current customer invoices, plus another $5,000 in marketable securities. Your current assets are $55,000. Now add up your obligations. For example, $10,000 in payroll, $4000 in operating expenses, and another $6,000 in supplier lines of credit. Your current liabilities are $26,000. Divide your current assets by your liabilities to calculate your working capital ratio. $55,000 divided by $26,000 gives us a working ratio of 2.1. In general, you want a ratio of 1.2 and 2.0 – anything under 1.0 is a predictor of serious business liquidity problems, while a figure over 2.0 suggests it’s time to put your money to work making more money, so you may want to consider ways to expand the business. A word of advice: before you do anything based on generic financial advice, talk to an accountant or an advisor who knows your business and can perform a comprehensive calculation of all your assets and liabilities.
Sadly, owners of smaller businesses often struggle to access working capital from bank loans – the application process is complex and demanding, and requirements are strict. You may not have the time, know-how, patience or credit history to qualify for the same financing options that were designed to meet the needs of big businesses.
One Park Financial works to help owners of small and mid-sized businesses access the working capital that they need. Our process is simple and straightforward, and we’ve helped many small businesses who have been turned down by banks to access funding. Visit oneparkfinancial.com or call 855.218.8819 to discover the options that make sense for you and your business.