Entrepreneurs can face a variety of financial issues that can impact the business's profitability, and even its long-term survival. Some financial problems may be caused by factors outside of their control, like when the economy dips or a new competitor moves in next door. Other issues may be more directly related to how entrepreneurs choose to operate their business.
Obtaining financing for a business can be extremely difficult, especially when first starting out. Banks are reluctant to lend money to new businesses, and potential investors may steer clear of budding entrepreneurs with little or no prior business experience. A well-crafted written business plan is essential when attempting to convince lenders and investors that you know what you're doing and have thought through your idea carefully. Other possible financing sources can include loans or grants from the Small Business Administration or even borrowing from friends and family members.
Negative Cash Flow
Cash flow refers to the amount of money coming into the business by means such as revenue from sales, versus the amount leaving the business in the form of expenses. Start-up companies may have difficulty developing and maintaining a positive cash flow, especially during the early stages when they have yet to establish a regular customer base. Spending too much money on things like rent and employee salaries can also create negative cash flow.
Mismanaging Marketing Funds
Entrepreneurs may be tempted to spend money on one expensive advertising medium like television, thinking it is the best way to reach a large number of people. By doing so, they may not reach their desired target market, rendering the ad ineffective. In contrast, some very small business owners may feel that they can't afford to spend much money on marketing, As a result, few people hear of the business, making it difficult to build a sustainable customer base.
Inadequate Insurance Coverage
A business owner's medical disability or a large liability claim can cause the financial ruination of a business. Some business owners may choose to do without items like health, disability or liability insurance to keep expenses to a minimum. However, doing so can put the business at major risk. As a rule of thumb, business owners should carry enough insurance to cover any expenses they could not afford to pay out of their own pocket.