8 challenges entrepreneurs face when starting a business

March 2019

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. That means current challenges need to be addressed, planning for growth, and protecting your business against a downturn. Here are the top issues that small business owners face right now.

1. Retaining Employees

The unemployment rate is low, so your best employees have many options. Small businesses struggle to match more prominent companies' benefits, so figure out what you can offer – flexible working schedules, family culture, mentorship, loyalty, and 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.

2. Diversified customer base

There's something to be said about targeting your offerings to a specific market but make sure you are diversified within that space. For example, if you sell products in a brick-and-mortar shop, make sure you're selling online and vice-versa. That way, if your site goes down or road construction blocks access to your shop, you still have another income stream. Also, diversify your product range, mainly if you sell trendy items. And if you offer services instead of goods, ensure your business does not primarily rely on one customer. You need to have enough customers to survive if one or two take their business elsewhere.

3. Unplanned growth

As your business becomes more successful, everyone will tell you it's time to grow (including our advice directly above telling you to diversify!). It would be best if you grew 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, and accessibility. Sometimes, raising your rates/prices may be better than spreading yourself too thin.

4. Burnout

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 how to take time off – weekly and chunks of vacation time. Yes, you might lose a little money, but your customers and clients indeed take time off and should understand that vacation time is necessary. Plan your vacation/days off to your business cycle, and if you have clients that are dependent on your services, make sure to give them a few weeks' advance notices.

5. Cash Flow

For many small businesses, managing cash flow is a real challenge. You either have plenty of money or none – there seems never to 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 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. A typhoon halfway around the globe can directly impact your business in our interconnected world. There's not much you can do about this, having enough working capital to see you through slow times.

6. Accounts Receivable

Even more frustrating is when you have much 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 will eventually 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.

7. Understanding Working Capital

It would help if you had 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 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 your assets and then dividing that number by your liabilities. For example, let's say you have $50,000 in ready cash and current customer invoices, plus another $5,000 in marketable securities. Your existing 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 existing 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 predicts serious business liquidity problems. At the same time, 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.

8. Access funding

Sadly, owners of smaller businesses often struggle to access working capital from bank loans – the application process is complex and demanding, and the requirements are strict. You may not have the time, know-how, patience, or credit history to qualify for the same financing options 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 they need. Our process is straightforward, and we've helped many small companies whom banks have turned down to access funding.