To know the potential problems of entrepreneurship, check out this article about the common financial challenges faced by entrepreneurs and how to overcome.
Entrepreneurship looks all shiny from the outside but there are financial challenges that entrepreneurs have to deal with throughout their journey.
Being your own boss, hustling daily, doing things your way, high passion, and high spirit - all sound amazing.
It is not so simple and easy, though. Entrepreneurship demands everything - money, time, life - in excess. Yes, it sometimes leads to burnout.
An entrepreneur is struggling daily. The only thing that keeps them going is burning passion.
Some to-be-managed daily issues for entrepreneurs are funding, operation, personnel, inner management, clients, etc. and so much more.
Plus, the wealth of the founder naturally depends on the success of the business, which, in case of the absence of proper setup, ends up being a tangled web.
In case you are about to start your own business, we are here to ease out some of the major challenges faced by entrepreneurs. Check out the points below!
Common Financial challenges faced by Entrepreneurs
1) Fund shortages / low cash flows
Cash flows are simply the “lifeblood” of your business.
If there persists a lack of consistent cash flows, even the regular functions of the company would come to a halt.
This is one of the main financial challenges faced by small businesses as well. This is mainly because they have limited financial resources and are dependent on a few key clients for their revenue
From payrolls, rents, and utilities to raw materials and inventory, cash flows are the prime requirement.
Your business would survive for some time in the absence of reasonable profits, but it is the cash flow that ultimately keeps the door open.
As you begin your entrepreneurship journey, in order to prevent cash flow shortages, you can try to tighten up the cash flow cycle.
Cash flow cycle is nothing but how the money flows inside your business - from paying off for raw materials, salaries, etc. to collecting receipts.
This can be done by receiving your receivables faster and stretching out your payables further, or the best is, both together.
2) Lack of available capital
Entrepreneurship has become a driving force behind India's economic growth and innovation, yet one of the most significant challenges faced by entrepreneurs in India is the lack of capital availability
Entrepreneurs in India face the challenge of lack of capital availability due to limited access to formal financial institutions, risk aversion among investors, and a complex regulatory environment.
Many entrepreneurs, especially those from marginalized communities or remote areas, struggle to secure loans or establish relationships with banks.
Gender biases greatly influence the funding landscape in India, creating an unfair situation and this is one of the main problems faced by women entrepreneur.
Women-led businesses face significant hurdles in accessing capital due to investor prejudices and other factors. A report from Innoven Capital revealed that only 12% of funded companies had a female founder, highlighting the stark disparity.
Be it for raw materials or just expansionary opportunities, you will need to borrow money to bridge the cash flow gaps.
However, what you can do is not wait for the need to arise. Instead, when you see the potential, then & and set a plan for funding/financing your upcoming projects.
To access capital beforehand, you can try out the following options:
- If you have a small business with enormous potential, well, venture funding would do the deed for you.
- If you want to give up equities in exchange for cash, then private equities will be the best for you.
- You can also look for funding options from various banks. Or any new government initiative can be useful too. For example, the Startup India scheme.
- Your personal savings can be used, too.
3) Current market conditions
If the economy, on a broader level, is suffering or gaining, this will definitely affect your business, too.
This is one of the common challenges faced by young entrepreneurs as they often enter markets that are already saturated with established players. Established companies may have greater resources, brand recognition, and customer loyalty, posing significant barriers to young entrepreneurs
The point is that these economic business cycles are inevitable.
What you have to do is manage your business in a way that is always prepared to handle the downturns and take advantage of the upturns.
Maintaining a strong cash flow, keeping financing options always ready, etc. will ease out the downturns and take advantage of the available credit upturn.
You must encourage your business to take on expansionary activities.
4) Management of business vs. personal finances
To prevent one of the problems faced by new entrepreneurs, it is important to follow this rule: Always keep your business finances and your personal finances separate. It is never a good idea to mix both.
In short, always keep a separate bank account for your business in order to track the cash flows properly.
If you do not do so, it can create problems for your business.
One example of this is that this mix can be considered a red flag not just by internal auditors but by government auditors, too.
So yes, do apply for a business checking account and business credit card. This will really help you distinguish the taxes during the tax season.
Lastly, make sure to pay yourself a set amount salary and track your personal finances instead of just paying yourself an ad hoc amount based on profits.
5) Tax compliance & auditing
Now that you know that cash management is already challenging, make sure you do not worsen it further.
Look if you're overpaying or underpaying your taxes - both are harmful for your business.
It is always good to keep an accountant in your staff to maintain these records.
To reduce the financial challenges faced by entrepreneurs in India and to encourage start-ups, the government of India has also launched several tax incentives under its “Start-up India” campaign.
Additionally, to save on taxes and plan for such opportunities, do regularly meet your financial advisor along with the accountant.
Handling a business is not the job of a faint heart - you need strong skills to run that.
Upskilling is one of the challenges faced by entrepreneurs when starting a business. So, when establishing your own business, make sure to learn from the best, explore the field as much as you can, maintain good finances, and if needed, take expert help.
The most difficult part would be the management of cash flows, and this should not be taken lightly. From receiving to dispersing, make sure that the process is not leaking anywhere.