4 Common Financial Problems That Small Businesses Face

Surviving as a small business was challenging even before the coronavirus pandemic. Only about half of small businesses typically keep their doors open for at least five years in Singapore, and more than one-third of Australian businesses typically fail within that same timeframe.

The pandemic has only worsened already challenging conditions, with a recent Frost & Sullivan study finding 42% of small and medium businesses across Japan & Asia Pacific (JAPAC) were negatively impacted by COVID-19, including a majority in Singapore and Hong Kong. While each market faced its own unique challenges, a loss of sales leading to a squeeze on profits and cashflow was at the top of the list across the region.

While the pandemic took a heavy toll on many businesses, many of the challenges they faced were the same problems businesses usually face, only magnified. Nobody knows when the next major downturn will come, but by identifying the most common financial challenges businesses face, leaders can put measures in place to mitigate the effect of any unfortunate surprises.

4 Common Financial Problems that Small Businesses Face

1. Loss of Customers

Customer retention is a perennial concern. Of the entrepreneurs that Frost & Sullivan surveyed who said they had failed, 56% cited a difficulty in getting customers as a primary cause. Conversely, 40% of those that succeeded cited effective sales and marketing as a top contributor.

Tracking retention and churn rates is a good way to measure the effectiveness of different tactics to minimise customer loss. Mixpanel analysed anonymised data from 1.3 billion users to come up with benchmarks for customer retention and found the average eight-week retention rate across industries is 20%.

Take the number of customers at the end of a certain period and subtract the number of customers acquired during that period. Then divide that number by the number of customers at the start of the period, and multiply that by 100 for a percentage.

Small changes in retention rate can make a big difference in profits. An oft-quoted Bain & Company statistic says that by increasing customer retention rate by 5%, a business can increase its profits by 25-95%. 

To increase customer retention, look at ways to increase customer loyalty, as the cost of acquiring new customers is much higher than keeping existing ones. Tactics include instituting loyalty programs, offering customers exclusive discounts and developing easy ways to solicit feedback from customers. Make sure you’re connecting with clients frequently so you can address any concerns quickly.

2. Pressure from Credit Sources

The most common source of capital to finance business expansion is personal and family savings, followed by using the business's profits and assets, getting business loans from financial institutions, and obtaining business credit cards.

According to Frost & Sullivan’s research, one in three entrepreneurs who said their business was unsuccessful cited a lack of funds to invest in it as a primary factor. The most common types of external financing for small businesses are loans and lines of credit.

In many instances, like when entrepreneurs run a sole proprietor business, they use their personal guarantee to receive financing. One way businesses owners can ensure they don't take on more debt from than they can service is to diligently and accurately track expenses associated with the loans. This can include both loan expenses, like interest and fees, but also the costs associated with the purpose of the loan. For example, if you are borrowing money to update your restaurant’s kitchen, in addition to the cost of the installation, you should also consider things like courier fees or the cost of being closed for a number of days.

3. Repeated Loan Refinancing

Another way businesses may look for cash is by refinancing loans.

When the business took out its first loan, the terms may not have been as favourable as they are when the organisation has been making money for a few years. For business owners who have improved their credit scores, increased revenue, or increased the value of assets, refinancing a loan may be a good idea. Rates could be more favourable, and payments will be lower, which means more cash the business can use.

While refinancing is a common practice, doing so to cover operating expenses could signal trouble. If a small business owner used their own assets to secure a loan, refinancing debt may, possibly affecting their personal financial standing. Small business owners also need to consider whether there are penalties for paying off the old loan early. If those penalties outweigh the benefits of refinancing, it’s not a good idea.

While a borrower may refinance in order to shorten the loan term, this is unlikely to be the case if the goal is to reduce monthly expenses. The benefits of a lower interest rate are partially offset by an increase in total debt, as refinancing fees are often added to the total owed. Depending on the size of the debt, how much lower the new interest rate is and the company’s objectives, refinancing will likely extend the duration of a loan, or at best retain the current payment schedule.

4. Poor Work Environment

There’s no question that having the right team can help your company fulfil its potential. Frost & Sullivan's study found that 36% of successful businesses cited having great employees as one of the main reasons for their success. But even pre-coronavirus, small businesses often have difficulty attracting qualified talent.

Beyond the basic cost of salaries, and associated costs like insurance and pension contributions, business leaders should also consider the toll that high staff turnover can have on a business. While it may be hard to compete with some of the perks offered by larger organisations, and the ROI of a ping-pong table is yet to be determined. The most important factor to a strong company culture is the employee's manager, followed by meaningful work and flexibility, commute times and professional development.

Small businesses should look to create a safe and inclusive environment in which employees feel appropriately compensated and have access to development opportunities. Ensuring this type of environment is in place does not need to cost a lot of money, and for most businesses will be a worthy investment as the drain on resources involved in recruiting new hires all the time can be significant.

How Financial and Accounting Software Can Help Solve Financial Problems

To prevent all the above issues—or catch them before they become bigger problems—an organisation needs to see and understand how cash is moving in and out of the business, and have total confidence in those numbers.

Accounting software gives companies visibility into all their revenue and expenses and allows them to track and analyse key financial metrics over time. Additionally, this software can automate accounts receivable processes to help reduce days sales outstanding and increase cash flow. It also helps businesses track bills and make the most of their payment terms to optimise accounts payable management, all while maintaining strong relationships with key suppliers.

Finally, accounting software makes it easier for companies to provide financial statements and other essential information required to secure financing.

Having automated accounting processes also helps small business hold on to a very important part of their team—those in the finance organisation. Companies are holding on to good people by providing better pay, perks, and advancement opportunities than competitors. With many mundane accounting tasks automated, accounting and finance team members can refine other skills, such as critical thinking and communication. And with a cloud-based accounting system, they can further improve on one of the most in-demand technology skills for accountants: proficiency with cloud-based systems.