Keeping a small business going isn’t for the faint of heart. While 80% of companies with fewer than 500 employees make it through Year 1, says the U.S. Chamber of Commerce, just 70% are still operating at the end of the second year. By the time they hit the five-year mark, just half of small companies are still in business.

Fortunately, these sobering statistics don’t keep Americans from reaching for their entrepreneurial dreams: As of 2018, there were 30.2 million small businesses operating in the United States.

Of those small-business owners who shut their doors, nearly half point to a lack of funds. Put simply, not enough money was coming in for them to pay employees or cover other expenses. In this article, we’ll look at the Top 10 financial challenges that small businesses typically deal with and show how to overcome them—and beat the odds.

10 Top Financial Challenges for Small Businesses

Here are the top financial challenges that small businesses are grappling with and some tips to cope. The goal: Keep your company solvent, profitable and productive.

What are the biggest challenges for small businesses?

  1. Limited or Inconsistent Cash Flow
  2. Not Using a Budget
  3. No Preparation for Unforeseen Expenses
  4. Not Raising Enough Capital
  5. Too Much Debt
  6. Neglecting Necessary Reporting
  7. Poor Tax Compliance
  8. Not Paying Bills on Time
  9. Mixing Business and Personal Finances
  10. Poor Marketing Tactics

Limited or Inconsistent Cash Flow

Most companies struggle with managing cash flow. From simply invoicing effectively so you bring in enough to cover the monthly bills to accumulating cash to invest in growth, liquidity is an ongoing issue.

Tips for Managing Receivables and Payables

Receivables Payables
Offer a discounted payment in return for quicker payments Check contracts to be sure that your company isn’t paying suppliers early
Engage with consumers to help prevent late payments, disputes or defaults Map your business-critical suppliers to determine priority of payment
Send timely, thorough invoices and proactive reminders Check for discounting opportunities with suppliers
Ensure there are no barriers to payment, such as invoice errors or delayed billing Communicate to understand which suppliers may be at risk and which suppliers can potentially extend terms
Prioritize customers with large balances in the cash collections process Ensure systems and processes are efficient to avoid delays and errors
Make sure your payment system is functional and convenient. Online with multiple payment options works best Make sure that payment is performed through the agreed payment method
Define weekly cash collection targets When possible, calculate payment terms from invoice receipt date rather than from invoice date

Cash flow 101 involves balancing accounts payable and accounts receivable. By maximizing the cash-to-cash conversion cycle, companies ensure access to capital.

Beyond those basics, companies should develop cash flow forecasts based on historical performance and current conditions. Always factor in contingencies—industry changes, economic downturns, customer shifts—and use “what if?” scenarios to develop a realistic financial plan. In fact, scenario planning is on top of many companies’ to-do lists, to avoid the unprepared situation many found themselves in when the pandemic hit.

For companies that extend credit terms to customers, top ways to improve cash flow include establishing clear payment terms, invoicing effectively, offering discounts for early payment and making it easy for customers to pay you.

Combined, these strategies will maximize liquidity.

Not Using a Budget

If you’re running your business by the seat of your pants, just hoping that there will be enough in the bank to pay the bills at the end of the month, it won’t take long to wind up with more debt and financial responsibilities than you can handle.

Our advice: Develop and stick to a budget. Doing so will not only help you plan for the future, it will give you a tool for analyzing expenditures and the ability to change direction quickly when needed.

Regularly update your budget to reflect current circumstances and use it to make good business decisions. A budget should be a living document, not something you write then toss in a virtual (or literal) drawer.

In fact, flexible budgeting is a hot trend among entrepreneurs.

Static vs. Flexible Budgeting

Static Flexible
Remains the same even if there are significant changes from the assumptions made during planning. Adjusts based on changes in the assumptions used in the planning process.

At minimum, every small business budget should include these five elements:

We also recommend building in some savings for unexpected events.

No Preparation for Unforeseen Expenses

Unforeseen expenses can derail any small business’ best-laid plans. Having a dedicated account in which you build up a rainy day fund will give your business a cash reserve that can get you through tough times—or help you grow when the time is right.

Here’s how it works: When times are good, put what you can into the account and let it grow over time. You can also set up automatic transfers from your business checking account to its savings account so that you don’t need to do it manually; the money will be accessible if you need to pull some back.

One advantage to a rainy day fund is that it can help you minimize debt, thereby reducing interest expenses. Which leads us to our next challenge.

Not Raising Enough Capital

One in five business owners who applied for funding during the prior five years was denied, according to Nav’s Small Business American Dream Gap Report, and 82% of all the business owners surveyed didn’t know how to interpret their companies’ credit scores. The research also shows that individuals who have a better understanding of their business credit scores are 41% more likely to be approved for a loan.

As we discuss in our piece on determining valuations, there are five main paths to raising capital:

  • Venture funding for young companies with strong growth potential.
  • Private equity for those willing to give up a chunk of the company in exchange for cash now.
  • SBA-backed loans. These are somewhat easier to get today than they were a year ago, but loan amounts are typically small.
  • Bank loans without government backing. As always, strongly dependent on good collateral and stable, growing revenue. Also, in a small business, likely dependent on your personal credit. Your house may be part of the collateral.
  • Friends and family and personal savings—the most popular options, based on data from the Bureau of Labor Statistics.

A dearth of working capital is a problem for companies of any size, but it can be especially detrimental for smaller entities with fewer resources. While having cash on hand every month to pay the bills—with some left over—is a good thing, a lack of capital can prevent a small business from hiring, expanding into additional markets and exploring new opportunities.

How to improve your chances of getting a loan, attracting an investor or otherwise accessing capital?

  • Have a business plan, in writing, and potentially a pitch deck.
  • Work to improve your credit score.
  • Make sure your cash flow, P&L statements and balance sheet are updated, accessible and auditable.

With an automated financial management platform in place, you can easily create these reports and have them ready to present when that investor or banker asks for them.

Too Much Debt

Entrepreneurs are rightfully proud of “bootstrapping” their way to success, so it’s not unusual for business owners to take on debt to launch their businesses. But there absolutely is such a thing as too much business debt. Maybe they ran up a little too much money on a personal credit card, or perhaps their local banker extended a line of credit that’s now used up and commanding a high interest rate.

Whichever debt vehicle was tapped into, these situations can have significant short- and long-term impacts on the company. For example, it can take time for a firm’s positive cash flow to start, and in the meantime, there are employees, suppliers and overhead to pay.

Here are four steps you can take to minimize your business debt levels and get your finances back on track:

  • Identify areas where you can reduce costs. Perhaps you can sublease unused office space or sell excess equipment. While shrinking your workforce is not an attractive option, it may be necessary to keep your business alive.
  • Use runway extenders: Stay connected with your customers, and seek out ways to increase your exposure and/or improve your business model, and thus your revenue. Offer your best customers markdowns if they can pay you more quickly. You should also contact your suppliers to arrange discounts and/or deferred payments.
  • Consider creative financing options. Angel investors, crowdfunding, accelerators—there are ways to raise cash without big payments.
  • Contact every creditor and advise them of your predicament. Ignoring your lenders will only make matters worse, while tackling a debt problem is easier when you act early. Since it’s in everyone’s interest to find a solution, request that your lenders work with you to lower interest rates, increase your credit line or restructure your repayment options.
  • Consolidate your business loans into one payment, which may reduce monthly costs without negatively affecting your credit score. A business debt consolidation loan, like one from the SBA, can allow you to deal with a single creditor rather than many and perhaps get a lower interest rate.

Neglecting Necessary Reporting

Small businesses must record all financial transactions, often with the help of a bookkeeper. Those items include sales, expenses and earnings. While private companies aren’t required to report financial data, poor record keeping can lead to serious problems. Misstating revenue on tax forms and improper deductions can result in fines, interest charges or even jail.

For public companies, not reporting financial data, or filing inaccurate reports, can lead to financial losses and time spent trying to fix problems.

Accurate reporting is crucial when filing tax forms required by local, state and federal taxing authorities—and potentially other governing bodies, depending on where your business is located. Reports must be filed on time or the company may face fines and other penalties.

Not recording transactions accurately can create a snowball effect, hurting monthly cash flow and impacting other financial reports. This is also something that will cause you big problems with auditors.

Some business owners create reports based on data retrieved from spreadsheets and receipts, while others use automated systems to run this aspect of their companies. With a dedicated ERP system, companies get more than automated, accurate financial statements. A modern financial reporting solution delivers real-time financial analysis and modeling across every dimension of your business for detailed insights into corporate performance and improved decision-making.

Poor Tax Compliance

Cash management is difficult enough as it is; there’s no point in complicating things by overpaying the IRS. Still, up to 85% of small businesses overpay on their federal income taxes each year. Others underpay and wind up on the wrong side of the IRS or other authorities. Both situations take time, effort and money to work through.

One of the biggest issues that businesses face regarding federal taxes isn’t payment. It’s the cost of compliance. And this burden hits small businesses proportionately harder than their larger counterparts. According to the IRS, companies with under $1 million in revenue bear nearly two-thirds of business compliance costs.

Not Paying Bills on Time

Suppliers, landlords and utilities want to get paid on time. And while the occasional late payment may be overlooked, consistently remitting payments late can cost a small business dearly. Damaged supplier relationships, being cut off from needed services and constantly running behind the debt eight-ball can all have a profound impact on a company’s financial health.

About 55% of companies still handle their accounts payable (AP) processes manually, says PayStream Advisors. That’s time-consuming and prone to fraud and mistakes. An automated system saves significant money and time; it also reduces data-entry errors and helps prevent fraud through a system of “touchless” controls that run behind the scenes. Combined, these functionalities translate into important benefits for companies that adopt accounts payable automation software.

Accounts payable automation software helps reduce the number of manual tasks that finance staffers must perform . For example, instead of manually managing vendor invoices and recurring expenses, organizations can use an automated system to submit invoices, manage the invoice approval process and send payments to vendors.

Mixing Business and Personal Finances

Keeping personal and business funds separate is one of those “Business 101” lessons that some owners of small companies choose to ignore. In fact, more than one-quarter of small businesses do not have separate business bank accounts, according to a Clutch survey, and 23% of firms cite mixing business and personal finances as a challenge facing their companies.

These business owners’ concerns are legit: Commingling business and personal funds is a risky practice that makes it difficult to monitor cash flow and could ultimately damage the value of a company. Auditors, whether from the government or an internal audit, will see this as a big red flag.

Avoid this problem by opening a business account and using it to manage all company-related inflows and outflows—including your own salary, which should be a set amount versus just a land-grab at the end of every month. Your bank may also offer a business credit card that you can use to manage your cash flow while running your business versus using your own personal card. That way, when you need to substantiate deductions or other transactions, all business-related items will be easily accessible and neatly organized.

Finally, growth, including of your bank account, requires soliciting your value proposition—a perpetual challenge for small-business owners.

Poor Marketing Tactics

If you’re not continually signing up new customers, you’re ceding them to competitors. And while some “boutique” or small businesses can get by serving the same handful of clients year after year, companies with growth and profitability aspirations need new clients to help them achieve those goals.

To get these clients, business owners must deploy marketing strategies that attract, engage and retain customers. This is one area where companies that do get it right can really shine.

While some companies outsource marketing to third parties, others get creative and tackle it in house. You can get a lot of awareness on a small budget by using some guerilla tactics. And, many how-to resources exist, such as the marketing news and topics section on Entrepreneur.com, where you can find relevant articles and videos to help you spread the word about your business—and drive new sales. Even finance leads can help with social marketing efforts in some surprising ways.

Financial challenges are a reality for all companies, but they can be especially challenging for small-business owners who are trying to get out of the gate without going broke in the process. By following the advice outlined in this article, you’ll avoid some or all of these issues while positioning your company for success in any market.