It is natural for all entrepreneurs to begin their businesses with a great deal of enthusiasm, whether they are starting a simple coffee shop or a world-changing idea. However, even with the brightest ideas and a hard-working team, it doesn’t take much time for the harsh realities to set in.

In 2019, statistics showed that nine out of ten start-ups failed. It also goes on to say that 21.5% of start-up businesses fail in their first year and 30% by the second year. By year five, 50% of the business have failed and only 30% of business make it to year ten. Moreover, the reason behind business failures is the same in almost all cases – unbeatable financial challenges.

In this article, we’ll walk you through the financial issues small business owners need to be aware of before they begin their journey. Being prepared is key and adapting and being able to face the financial challenges that might be coming your way will set you up for optimal success and would give you a better chance of surviving them and coming out on top.

1 – Securing Initial Capital

Everyone knows you have to spend money to make money. While small business owners understand this aspect of running a business, many don’t bother to find out how much they would need until their business starts generating profit. That’s explicitly why the reports show that 30% of new companies fail — they run out of cash.

Unfortunately, several small businesses also fail to meet the requirements while accessing the initial funding. Turning to alternative lenders means higher interest rates, which only digs them deeper into the financial hole in the long term.
As a business owner, you should take your time evaluating the different financing options and make a wise decision accordingly.

2 – Debt Repayment

When small business owners aren’t able to acquire the necessary capital, they turn towards their only option of taking loans from lenders. While they might have high hopes of establishing their businesses, this doesn’t necessarily mean they would know how their products or services will perform and how much time it would take to grow their sales.
When they struggle to make their way through the competitive market, that’s where they find themselves in deep water when they can’t repay their debts on time. In the meantime, the owners also have a troubling time to work up to a healthy income for paying their working staff and suppliers.

3 – Unanticipated Finances

It’s nearly impossible to foresee all the expenses a small business might face in its initial years. From paying for your equipment’s downtime to facing lawsuits or out-of-the-blue tax payments, these unexpected expenditures can drastically threaten a business’s budget. It especially becomes a struggle when your business hasn’t started making any profit to comfortably cover such huge costs.

While the insurance money can cover your expenses to a certain extent, it’s impossible to depend upon it entirely. That’s because it wouldn’t help you in situations when you’ll likely be paying the lawyer fees or covering up your loss of sales. Moreover, even a relatively small expense that was not accounted for in the company’s stated budget can severely challenge business owners to pay the bills and make payrolls.

4 – Inconsistent Cash Flow

Uncertain or inconsistent cash flow can be damaging to a small business’s financial management system. Furthermore, even the threat of instability forces the business owners to forego their new ideas they might have had in their minds when starting their business. This gives them a vital disadvantage compared to their more established counterparts. They can’t act upon their ideas and lose their full potential by not taking prospective lucrative risks.
It takes a single month of bad financial performance to send your business spiraling downwards. In contrast, it can take half a year or more to get back on track to regain stability. The key to preventing such circumstances should be to focus on maintaining your company’s cash flow instead of dwelling all your energy on making a profit. The reason behind this is that once your business is stable for a few months, it’ll automatically start generating sales for you.

5 – Tax Payments

The Internal Revenue Service (IRS) has the right to impose fines and penalties on business owners who fail to pay their taxes. The interest on the unpaid taxes is calculated at the rate of six percent per year, and late payments are usually half percent per month. Moreover, the IRS also has the liberty to seize a company’s equipment and even the business itself when they fail to comply with their notices.

All of this can take an even significant financial toll on your business. That’s why you need to keep up with your current record keepings, account codes,, and cash transactions at all times. One misstep, and you can hit a brick wall, shutting down your business for good.

6 – Personal Expenses

The financial challenges don’t only impact the company itself, but the issues extend to the business owners and their families as well. It isn’t unusual for small business owners to commit a considerable portion of their savings and assets to their start-up company’s development. So, when a business suffers, it only makes it more challenging for them to make ends meet in their personal life. This is one of the main reasons they ultimately choose to call their business off when things don’t go as expected.

The Bottom Line

Although these are the six primary financial challenges that drive the discussed 30% of businesses to fail in the first two years, it doesn’t mean you have to be one of them. Many small businesses are going after the wrong market and through research, operational planning, and flexibility, you can prevent your company from the pitfalls of a new business and be a prominent part of the 30% who succeed in establishing their grounds in the long term.