By Ben Richmond
Making the decision to start a small business is no easy feat, but it’s incredibly inspiring that so many people try; in fact, on average,
4.4 million people across the U.S. open a business. And while not all of them succeed, there are a few keys to success that vastly improve their chances.
First and foremost, having the right mindset and a clear path forward are important—these improve prospective business owners’ chances of leading a career and life of fulfillment, both personally and professionally, and are key for staying grounded during challenging periods.
Indeed, as with any important life journey, owners can expect some speed bumps along the way. From securing financing in the beginning stages to hiring and retaining talent, there is much to master to help ensure a business achieves longevity and sustained growth.
Running a company: What it takes to get from passion to reality
When times get tough, as they certainly will throughout any entrepreneur’s journey, it’s important to remember the reason behind starting the business in the first place. To gain deeper insight into this topic, we recently conducted a study of 1,000 business owners across North America.
The survey revealed that the majority of entrepreneurs decided to open their small business to fulfill a long-time passion, showing the strong emotional connection between an owner and their company. It’s unsurprising that most small business owners will fight with all they have to keep their dream alive—especially during times of economic volatility like we’ve experienced in the past few years. From skyrocketing inflation to consumer spending habits turned upside down, entrepreneurs have faced many business challenges.
In alignment with this mindset, small business owners often reach into their own pockets to fund their business venture, or lean into external loans. According to the study, the number one way individuals capitalize their business is through personal savings (68%), and the second-most-common avenue is business loans (31%).
Both of these strategies carry a great deal of risk. Naturally, using your own money to start a business can put your financial future on the line. Borrowing, meanwhile, exposes you to the impact of higher interest rates and other challenges. One of the key problems today is a credit crunch. Following the collapse of several banks earlier this year, many financial institutions have tightened lending standards, and this isn’t lost on entrepreneurs. A May 2023 survey of small business owners by
Goldman Sachs showed that 77% of them are concerned about their ability to access capital.
More selective lending standards by banks unveil the fact that a true credit crunch is upon us. Right now, it is harder than it has been for years for small businesses to obtain loans. For those aforementioned small business owners who aren’t willing to forfeit their passion or businesses, they must have the financial stamina to succeed through a potential recession and tighter credit markets.
How small business owners can safeguard their companies
Given the fact that so many owners have sunk their own (or a bank’s) money into their company, at a time when the economy is slowing and credit is tightening, it is essential that an entrepreneur has a clear view into their business’s finances from top to bottom. Being able to see the financial picture from a holistic perspective, assess every factor, and make accurate predictions is one of the best ways to safeguard a business.
Here are tips for improving your approach to small business finances:
1. Ensure your receivables are up to date
Given the current state of the economy, it’s likely you have customers, distributors or partners who are tight on cash. Ensuring you are receiving payments on time can help to stabilize your balance sheet. As such, it’s a good idea to keep track of the status of all your receivables to ensure no information is lost, overlooked, or unorganized.
2. Conduct cash flow forecasting
A simple but often overlooked task, cash flow forecasting can help you make informed decisions about cash moving in and out in order to cut spending before it’s too late, and manage debt repayment timelines and terms. Having a business snapshot or live visual graphic that represents how your company is tracking through revenue, average pay times and expenses will allow you to identify trends and be better positioned to foresee future problems. You can then act quickly to reduce risk: accelerate accounts receivable, cut costs, seek outside financing, etc.
Having a forward-thinking approach and mindset is one of the ways to stay ahead of trouble, as well as having an actionable plan to stay on track to meet your goals.
3. Implement efficient inventory management practices
Utilizing technology can help your company perform effective inventory management. Automated processes will enable you to more accurately track incoming and outgoing goods, such as data collection on inventory and profit reports. There are a significant number of inventory management apps available for specific or advanced use cases.
Implementing efficient inventory management practices allows you to optimize your stock to avoid overstocking or understocking items. By having an inventory forecasting plan in place, small businesses can allocate their resources more efficiently and reduce unnecessary expenses, which contributes to improved financial stability.
Preparation is the key to business survival and success
In a world of countless unknowns, being prepared is the best path to success. If we have learned anything in the past three years, we know that expecting the unexpected is the new normal. And while small business owners have historically been on the frontlines of facing economic challenges, the volatile credit market makes this era even more harrowing.
By fully understanding a company’s financial picture, small business owners will have a better chance of being able to obtain capital when needed. Because, at the end of the day, entrepreneurs are superheroes, ready to fight new challenges and external pressures.
FAQs about small business survival during difficult times
How do I prepare my small business for a recession?
To prepare, business owners should prioritize having the right mindset and a clear path forward to encapsulate a holistic perspective of their business’s finances during a time when the economy is slowing and credit is tightening.
What are 3 things small businesses can do to survive during hard times?
Small businesses can survive during economic challenges by having a clear view into their business’s finances from top to bottom. This can be done by conducting cash flow forecasting, ensuring receivables are up-to-date, and understanding their inventory supply with the help of technology and outside partners.
About the Author
Post by: Ben Richmond
Ben Richmond is a chartered accountant and U.S. country manager at Xero, where he is responsible for driving Xero’s growth in the region. Ben has been recognized by CPA Practice Advisor as a “20 Under 40 Influencer” and was named Accounting Today’s “Top 100 Most Influential People in Accounting.”
Company: Xero
Website:
www.xero.com
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