5 Tips for Small Businesses to Better Manage Finances

While large corporations often grab the headlines, it's the small businesses that form the bedrock of the US economy. Recent data reveals that 99.9% of US businesses fall under this category, employing 61.6 million people—nearly 46% of the US labor force—and contributing to 44% of US economic activity.??

Despite their crucial role, SMEs face numerous challenges that hinder their growth. In this article, we'll delve into the financial hurdles confronting SMEs and provide five tips for small businesses to better manage finances.?

Figure 1 Most important challenges facing small businesses in 2024?

Financial challenges of a SME?

Research indicates that 20% of businesses fail within the first year, with the figure rising to 30% by the second year and 50% by the fifth year. Financial struggles, such as the exhaustion of cash reserves and difficulty securing additional capital, are significant contributors to this high failure rate. Recent years have seen these challenges exacerbated owing to the following factors.??

Inflation?

Rising inflation is posing significant challenges for small businesses, impacting their finances and profits in recent years. Unlike larger counterparts, small businesses often bear the brunt of inflationary pressures, with a recent survey indicating that 80% of small business owners have seen their expenses rise by 6% or more.??

Limited purchasing power exacerbates the situation for small businesses, forcing them to either raise output prices, cut expenses, or absorb losses. However, increasing prices can erode their competitive edge against larger competitors. Additionally, as inflation squeezes household budgets, consumer spending on non-essential items diminishes, further straining small businesses.??

In response to these fiscal pressures, many small businesses are seeking additional financing to maintain operations. Yet, accessing credit remains a significant challenge, as elaborated next.?

Credit Access?

Securing capital poses a significant challenge for small businesses, with 77% of surveyed small business owners expressing concerns about access to funding. This difficulty arises due to increasing interest rates, closures of regional banks, and stricter regulatory oversight.??

Small businesses heavily depend on small banks for financing. Consequently, the failures of banks like Signature Bank and Silicon Valley Bank had far-reaching consequences. The closure of these institutions strained the entire banking system affecting, even those not directly affiliated with the banks.??

Given these challenges, here are five tips for small businesses to better manage finances.??

Five Tips for Small Businesses?

Because of the financial challenges facing small businesses, it is essential for them to optimize costs and take a hard glance at the way they manage and deal with money. 'Hire accountant for small business ' is the number one advice many experts offer. An accountant can file books, analyze expenses, and suggest the best way to reduce expenses and boost efficiency. Here are some tips for small businesses for superior financial management.?

Tip 1: Cost optimization?

It is essential to analyze costs before businesses can make efforts towards reducing them. Research shows labor to be the number one cost factor, accounting for 70% of business spending, followed by inventory at 25-35%. Yet, most small businesses fail to fill open positions because they cannot compete with their larger counterparts in meeting employee salary expectations and demands.??

The best solution in this context is to hire remote resources at a fraction of local hiring costs. For example, law firms can hire a paralegal expert at 50% less cost compared to local hiring from Remote Resource. Remote staffing offers SMBs access to top talents at significantly lower costs and without legal and other compliance hassles.?

Tip 2: Analyze Capital Needs?

The rising interest rates, failure of several banks, and increasing regulatory guidelines have made it difficult for small businesses to access credit. Therefore, it is essential to assess your credit requirements early and work to secure them now. While banks are reducing their loan books, several small business lenders are expanding their ability to offer finance.??

Hence, SMEs should explore financing options from both bank and non-bank lenders and choose the one that offers the best benefits. In this context, businesses can also hire accountants remotely to explore different options and suggest the best alternative.?

Tip 3: Streamline Operations?

Technology plays a pivotal role in streamlining operations and optimizing costs for small businesses. Those that leverage technology to enhance efficiency stand to succeed in the long run. It's crucial for SMBs to utilize technology and hire remote staff to handle support tasks.?

This allows in-house resources to focus on core activities and customer satisfaction. By reducing costs and increasing efficiency without compromising customer experience, SMBs can position themselves as leaders in their industry.??

Tip 4: Select Projects Judiciously?

One of the oft-quoted tips for small businesses is that they should invest in growth. While it is essential for small businesses to invest in growth-fueling projects, it is equally important to be judicious about the choices. SMBs should examine the unit economics of an expansion project to understand the costs and profits.??

The business owner must then assess the market to determine the volume of goods to be sold at different price points. The prices should be set such that they lead to profit maximization with optimal effort. It is important to pursue expansion plans that offer the potential for marginal profitability.???

Tip 5: Prepare a Budget??

To have a superior grip over your finances, prepare a budget and stick to it. In this context, you can hire accountants to manage small business accounts and prepare budgets. The budget document will help SMBs have better control over finances and analyze areas of overspending and underutilization of funds, enabling them to manage finances more effectively.?

Summing up?

In the preceding pages, we discussed in detail the financial challenges faced by small businesses. Additionally, we provided 5 tips to help small businesses better manage their finances and navigate turbulent times effectively. Share your experiences as a small business owner in the comments below, including the problems you've encountered and the strategies you've employed to overcome them. Stay tuned for more engaging content on relevant business issues.???

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