Are you prepared for the financial challenges 2023 may bring to your small business? According to Forbes, The US alone has over 33 million small businesses. Out of these, more than 80% have a single employee. Individually, small businesses only impact the economy a little. However, when you consider them collectively, it entirely changes the picture.
From a small business point of view, mistakes are less costly than they are in bigger organizations. The scale is smaller, and getting back up is usually easier after a setback. Having said that, a business thrives and scales when it manages to minimize or avoid specific threats.
Roughly 2 out of 3 small businesses face financial risks. More often than not, it’s due to entrepreneurs needing more experience. You cannot predict when a challenge will come your way. Hence, recognizing and preparing for hardships in advance is a better strategy. Be proactive and navigate the obstacles by familiarizing yourself with these financial risks.
9 Financial Risks Small Businesses Must Prepare for
Are small businesses ready to face the financial hurdles of today’s economy? This article highlights the 9 critical financial risks small businesses must prepare for, offering insights and strategies to navigate these challenges successfully.
1. Missing Legal Framework
Beginners undergo legal frameworks because they want to save money on hiring lawyers who prepare all the necessary documents.
Such a mindset won’t lead to long-term success. Running a business comes with legal matters. Even a slight error, such as misunderstanding a law and failing to check with authorities, can lead to penalties. Ignorance is not an excuse. Regardless of how big or small a business is, its documents have to be in check.
If your competition or partners realize your operations are illegal, they will cut ties. Or, worse, they will report you to authorities.
The same thing can be said about employees, especially those working remotely. Neglecting to prepare a legal framework because “nobody cares or will find out” is the opposite of what a small business owner should think. Generally, enterprises operating while ignoring the law are liable and bound to face consequences beyond financial risks.
2. Failing to Diversify Income
A small business might have fewer income diversification opportunities. Still, with an ever-changing economy and market conditions, failure to adapt presents a significant risk. The more diverse your income, the more leeway you have to experiment and make mistakes. Your overall financial footing becomes more stable.
What are your options to diversify? It depends on the business type. Let’s say that a custom merchandise store is looking to expand. Their best option is to add new products or hire fresh designers to add fresh merch ideas.
Exploring new sales channels is another worthwhile suggestion. If you’ve focused on online sales, why not contact physical store owners? They might be interested in striking a partnership and selling your goods.
Finally, expanding the customer base should be a priority regardless. A small business can only sustain itself for so long by relying on a small pool of regular customers. Expanding the customer base is inevitable if the enterprise’s entrepreneur aspires to expand and turn the current version into a more profitable and sustainable model.
3. Managing Credit
Credit management plays a prominent role in determining the success of small businesses. A lack of credit policy indicates that the people running the venture are not taking their responsibilities seriously.
Monitoring and maintaining credit scores is imperative so the business is in good standing. Poor credit score dissuades potential lenders from giving out loans.
For starters, make sure that you pay all bills on time. A commercial credit score depends on a positive payment history.
Before committing to a deal, set a realistic time for your bill payment. You might be eager to overpromise a payment date but fail to deliver. Double-check with the accountant or another person handling that side of the business. Ensure you have a clear understanding of the invoicing payment terms before proceeding to settle the invoice.
Once you get confirmation, speak to the recipient. Setting a realistic timeline and delivering is much better than overpromising and missing deadlines. A business should still have a dedicated business credit file, even if it is small. The purpose of such a file is to collect and track relevant information to make sure that your relationships with the following parties are intact:
- Financial institutions
Remember to keep the document up to date with information related to the business. Changes in registration address, new expansions, employee numbers, pending lawsuits, etc., must be on the document.
By maintaining a solid credit score, you will have fewer struggles securing good financing terms. In addition, a firm credit management policy also helps fend off fraudulent activities.
Fraudsters can easily expose an organization’s vulnerabilities if the business struggles to manage their credit file properly.
4. Keeping Accurate Tax Records
Some small businesses ignore tax liability, thinking they will slide through and escape unscathed. The consequences of non-compliance with law regulations are extremely dangerous. A small error here and there is OK. However, if the records are clearly forged for the benefit of the business and the institutions get the hang of it, prepare for trouble.
Keeping accurate records can be tricky if there are hundreds or thousands of transactions to keep track of.
Automating invoices and other processes where possible with the help of software reduces the workload and leaves less room for errors.
Still, a professional accountant remains essential. A dedicated person who tracks and registers financial transactions is too valuable to pass up.
Plan your taxes. Try to project what the expectations are for the next fiscal year. Look at previous years and predict what to expect.
Knowing there’s money to cover the upcoming tax payment gives peace of mind. Set some money aside every month for your rainy day fund. Prevent invoicing issues by using Billdu, and discover small business tax tips for saving money.