As we approach the New Year in a matter of days, I would say 90% of entrepreneurs start to scramble and take stock of how 2015 has been for them. They would also start finalising the bonus amounts to be paid to their staff (and what’s left of the surplus), the budget for expansion needs, and a host of many issues that would shape the complexion of their business in 2016.

Are you one of them who is experiencing any of these?

I kid you not – many SMEs are first time entrepreneurs, and do not have sufficient bandwidth in all the functional areas. They are not able to estimate their own short term and long term financial needs accurately given all the uncertainties they face.

I know I am stating the obvious but good financial management is critical to the success of any business; it is particularly important in small and medium enterprises (SMEs) where the risk of insolvency is often little more than an unpaid invoice away.

Do you know what are the top Top 5 Financial Challenges Faced by Most Business Owners?

#1: Cashflow 

A key concern for small business owner-managers is cashflow management, or more specifically the cash conversion cycle. This is the firm’s ability to generate cash from its customers’ invoices, and the time it takes to collect these accounts receivable.

This has got to be the most common area in which small businesses face problems and setbacks, due to the fact that:

  • A high percentage of small businesses doesn’t make a profit in the first few years
  • Cashflow management could be a nightmare for the unprepared entrepreneur
  •  Startups are trying to monetise on a smaller market

Cashflow is the lifeblood of the business and problems affecting its proper planning and management could bring about drastic cash shortages, unpaid wages, having to recur to unnecessary loans and even stop production altogether.

#2: Rising and Unforeseen Costs  (that are unbudgeted)

An increase in raw material’s prices, rental (especially in Singapore’s context), suppliers’ rates, inflation, interest rates and insurance rates are some of the most common costs that affect small and medium enterprises’ financial position.

Also, unexpected costs, such as lawsuits, natural calamities, business licenses, growth opportunities and emergencies should always be considered in the general budget, which can be difficult to do for new startups.

 #3 Rising Interest Rates

If your small or medium enterprise operations’ rely on cash reserves, credit cards or savings, the future of your business might depend a bit too much on external aspects that could turn against you when least expected.

In this sense, interest fluctuations have a huge impact on the financial stability of a small business, especially if the venture is on a long-term loan, forcing the owner to re-finance its debt.

This is especially the case when business owners own several properties for investment (including their own residential ones) with exposure to mortgage rates.

Imagine having several properties and having to fork out additional $3,000 – 5,000 extra on top your monthly property repayments due to your property holdings?

#4 Profitability Pressures

Lack of profitability can present itself even if you are having great sales and enormous revenue. Generally, this indicates over-spending, hidden costs eating your bottom line or poor financial planning.

I have seen many balance sheets where increasingly higher level of the company’s funds are diverted into non-core assets and liabilities – suggesting that they are moving into non-related areas because their existing core business is facing consistently poor performance.

When business owners face consistent losses, they are desperate to show a short-term performance and start to go into unrelated industries; they may start to lose focus and deepen their losses even more.

#5 Tax, Regulatory and Legal Procedures

Legal, Taxation and business regulations are constantly changing, not to mention they can become incredibly complicated for anyone without prior experience. And while high quality legal or tax services can be expensive, a mistake on your tax filings or a bad procedure on a lawsuit can be even more costly.

So what should we make of these?

Problems are part of life. It is virtually impossible not to have any problems in any area of our lives, as they are necessary to progress and evolve. In my opinion it is much better to see these difficult situations as challenges rather than obstacles, since the word “problem” may represent a more negative than positive meaning.

Financial management education and support of owner-managers is important.

Education is the key to enhancing SME owner-manager financial management skills and performance. Owner-managers who have more knowledge of cash flow management and formal record keeping and their importance, are more likely to

  • keep good financial records.
  • superior financial knowledge and to manage their finances better.
  • regularly use them to make decisions.

Younger firms require a much closer attention to cash flow and working capital than their older counterparts, particularly if they are experiencing growth. Growth in SMEs is associated with investment in R&D, employee productivity, debt leverage and the effective management of cash flow.

Get organised and get help

The overall message from this research is that owner-managers of SMEs, particularly firms engaged in growth, need to learn how to maintain financial records and use financial reports to make business decisions.

Properly structured accounts that can generate timely reports on cash flow, liquidity and other key performance indicators (KPI) remain essential to the firm’s survival and success.

Firms in their early years from start-up will often experience a lack of working capital particularly if growth is strong. The efficient management of cash flow and working capital are therefore critical to survival.

They also help to boost profitability and this can in turn facilitate growth. Owner-managers who are experiencing growth or financial stress need to seek outsider assistance. However, they also need to invest in learning more about financial management and systems they require to effectively operate their business.

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