By Myranda Mondry
2021 broke a record year for entrepreneurship with five million new businesses started. This year more than 17 million Americans said they wanted to open a new business, according to data from QuickBooks.
These new business owners have unique challenges to face in the wake of the pandemic. Like inflation, which a recent QuickBooks survey found that almost all business owners (99%) are concerned about. Respondents also ranked supply chain, cash flow challenges, low funding, and skills shortages among the top threats facing small businesses this year.
There’s no magic spell to solve these challenges in one fell swoop, but small steps can make a big difference in overcoming them.
1. Rising costs and inflation
More than half of small business owners say inflation is the top threat to their business this year. Nearly every survey respondent said they’re concerned about the rising costs of goods and labor, and more than half say they’re very concerned.
To combat inflation, many small business owners have been forced to dip into business or personal savings accounts, or turn to credit cards and small business loans to cover rising costs. But these are only temporary solutions. As costs continue to rise, temporary funding will only get you so far.
To lessen the impact of inflation without draining your savings account or racking up more debt, consider this:
- Review your expenses. Identify where you can cut costs, like products and services that aren’t essential to your business or utilities you aren’t currently using.
- Review supplier contracts. Your supplier may be willing to negotiate a better deal, especially if you’re willing to pre-order or order in bulk.
- Streamline your invoicing. Send invoices right away and consistently follow up on past due invoices to keep cash flow on schedule.
- Rethink your pricing strategy. The rising costs of goods and labor may have thrown your profit margins out of whack. Sometimes raising your prices is the only way to combat inflation.
2. Supply chain struggles
In its most basic form, your supply chain begins with raw materials and ends with finished products in the hands of your end customers. Optimizing your supply chain can help you save money, streamline inventory, and improve customer satisfaction. But the events of 2020 taught us that an optimized supply chain simply isn’t enough—it also has to be resilient.
Your supply chain needs to be resilient enough to withstand demand surges, shipping difficulties, and global volatility. Today, 33% of business owners say supply chain problems are a top threat to their business. You can strengthen your supply chain by:
- Implementing buffers. Keep a buffer stock of inventory to protect against supplier delays or demand surges. Build in a time buffer to reduce later delivery. And implement a capacity buffer to leverage underutilized space, like warehouses.
- Diversifying your network. Diversify your manufacturing and sourcing network to combat supply chain disruptions. In the event of unforeseen circumstances, you’ll have a back-up plan.
- Practicing demand forecasting. Use hard data to predict demand so you can gauge your needs ahead of time. Your predictions might not always be accurate, but it’s better to be safe than sorry.
3. Cash flow challenges
More than two-thirds of small businesses say they struggle with cash flow problems—a challenge that has only been exacerbated by rising costs and inflation. When more cash is flowing out than coming in, you can’t pay your employees, suppliers, or other debts. You may have to dip into personal savings to compensate, or you might miss out on exciting investment opportunities due to your lack of cash.
Negative cash flow can lead to a number of serious issues for your business. When cash flow slows to a trickle, there are a few things you can do to bounce back to cash flow positive:
- Build a cash flow forecast. A cash flow forecast or projection predicts the amount of money entering and leaving your small business. Keeping a close eye on your cash flow forecast helps you better understand where your money is going and prevent cash flow problems before they arise. One study found that using software to track cash flow can result in a 50% reduction in loan interest paid.
- Reduce expenses. Discontinue non-essential services, cancel or reduce premium services, and reduce operating costs while you work on bouncing back.
- Get paid faster. Faster payments keep cash coming into your business. Ask for partial payments upfront, incentivize early payments, and make sure you’re accepting multiple payment methods—making it incredibly easy for customers to pay.
4. Low funding
One in five small business owners say low funding is the biggest threat to their business this year. If you’re struggling with inflation or cash flow, there’s only so much you can do before you just need funding. Sometimes, a small business loan is the only way to get back on top.
Applying for a small business loan is easy—but being approved for small business funding is easier said than done. Improve your chances of getting approved for a loan by:
- Reducing your debt-to-income ratio. This means paying off old balances, increasing existing credit limits, and paying bills more frequently. Your credit utilization ratio should be between 15% and 30%.
- Improving your business credit score. Find your business credit score through a reputable credit agency. Improve your score by always paying bills on time and opening credit accounts with suppliers when possible.
- Boosting your sales. Lenders like to see that your business is already generating revenue. Boost your sales as much as possible before applying for a loan to increase your chances of approval.
Small business grants are another good funding option for small businesses, but they can be much harder to obtain. The application process is much more rigorous than applying for a small business loan. But if you think your business may be eligible for a grant, it’s well worth your time to apply. If all else fails, crowdfunding is a modern solution to funding woes, or turning to friends and family for financial support.
5. Skills shortages and employee retention
One in four small business owners says hiring new employees is a top priority for 2022, but finding skilled workers is a top threat. Nearly half of small business owners (49%) say hiring is getting harder. But keeping skilled workers is just as tricky, 40% say employee retention is a challenge.
To solve these problems, many small businesses are raising employee pay for new and established workers. They’re beefing up employee benefits and offering year-end bonuses to sweeten the pot. These tactics go a long way towards recruiting and retaining talented employees. But there are a few more things you can do to increase employee retention and make your business more attractive to job seekers.
- Focus on diversity, equity, and inclusion (DEI). More than three in four employees say a diverse workforce is an important factor when evaluating job offers, according to data from Glassdoor. Nearly a third say they wouldn’t consider working for a company with a lack of diversity. Commit to DEI by being transparent about the gaps in your business, gathering feedback from employees, and clearly communicate your plan to improve.
- Offer remote or hybrid work options. Nearly half of small business owners report that they have remote workers in the aftermath of the pandemic—and those workers plan to continue working remotely. Research from Owl Labs found that half of employees said they would not return to jobs that don’t offer remote work. Employees crave the flexibility and autonomy that remote and hybrid work offers.
- Invest in employee development. A LinkedIn Learning report found that 94% of employees would stay at a company longer if it invested in their career. Investing in employee training and development shows your workers you value their contributions and care about their success.
Whether you face these challenges or not, every business, new and established, can benefit from saving money, improving business processes, and cultivating a strong team. Small tweaks to your existing processes can make a big difference to the success of your business this year and beyond.