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The top three problems with small business lending—and how to fix them

Is growing the small business loan portfolio on your bank or credit union’s agenda? If so, you’re not alone. A recent survey by the American Bankers Association found that 61 percent of banks surveyed plan to moderately or aggressively grow their small business lending (loans between $3 million and $100 million) over the next two years. In other words, many financial institutions will vie for the same small and medium-sized lending business.

Yet will doing that be easy? Not necessarily. BAI industry insights presented earlier this year at a business banking executive workshop show that business banking loan growth declined in 2017 more than anytime in the past five years at 5.2 percent. Of the largest loan categories, the only one to show any growth between 2013 and 2017 was SBA loans. And those rose just a hair in 2017, up 0.1 percent, BAI figures show.

Some industry experts see positive signs. “Fifty-five percent of the owners of small and medium enterprises are willing to consolidate their personal and business relationships at the same financial institution,” says David Kerstein , president of Peak Performance Consulting Group , in a recent BAI Banking Strategies article on revenue growth .

Naming the three small business loan roadblocks

With increased competition ahead, banks have two choices to win new small business loans: offer better pricing or easier terms than competitors. However, both approaches could hurt bank returns and potentially increase risk for the institution. They could also make small business lending more efficient and borrower-friendly so that the financial institution can win, process and manage more loans without big staffing increases or added expenses. Indeed, the surveyed banks most frequently identified the following as their top challenges in small business lending:

About three-quarters of the nearly 200 respondents in ABA polling cited efficiency as a challenge when it comes to small business lending. The process/operations/staffing category was named by 62 percent of those surveyed, while 55 percent identified cost as a small-business lending challenge.

For most banks, the paper- and labor-intensive process of small business lending results in multiple handoffs between bank employees, frequent back-and-forth communications with customers and lengthy approval times, despite the small-balance nature of many small business loans.

“By the very nature of it, because it’s so transactionally based, loan operations can always be improved on,” said Alison Trapp, who leads the credit risk practice for Sageworks Advisory Services, during a recent webinar on process improvement . “How we manage the flow of documents is a huge piece of loan ops; how we store them appropriately; how we get them to and from our lenders or appraisers or the third-party vendors that we use—all of that stuff really opens itself up to process improvement. I think everybody wants to bring in the loans more efficiently.”

Life of the loan: Let’s get digital

Digitizing the small business loan from beginning to end can reduce processing time, which allows banks and credit unions to provide quicker, more transparent decisions. Life-of-loan digitization also makes it easier for high-salaried lending and credit professionals to focus on those loan decision aspects that require more intense analysis—especially if they need not spend as much time on duplicative data entry and tracking down components of the application.

However, only a tiny fraction of small business loans (0.1 percent) are handled digitally end-to-end, according to a 2015 survey of two dozen banks by Bain & Co. and SAP Value Management. The same survey found that only 8 percent of small business loan applications are submitted on digital channels. Smaller banks, in particular, tend to lag in lending technology adoption, which means they have tremendous opportunity to make small business loans more efficient and profitable.

End-to-end, but to which end? Build or buy?

While some banks build their own end-to-end solutions, others are working with technology partners to expedite their ability to originate, underwrite and close small business loans. The ABA report outlines three advantages for banks that partner with fintechs that offer an end-to-end digital lending solution:

Some fintech firms can also assist financial institutions with process improvement and change management to work through whichever policy and operational changes are required for meaningful efficiency improvements.

It’s common knowledge that banks able to innovate and leverage new digital lending technologies will be well-positioned to compete. Originating and servicing these loans must be cost-effective but there will be challenges to get there and win the SMB loan game. Competition, always a factor in the past, could grow even more intense. In solving the small business lending puzzle, it pays more than ever to keep the three top problems top of mind.

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Mary Ellen Biery is a research specialist at Sageworks , a financial information company that offers financial institutions lending, credit risk and portfolio risk solutions.

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Six problem-solving mindsets for very uncertain times

Great problem solvers are made, not born. That’s what we’ve found after decades of problem solving with leaders across business, nonprofit, and policy sectors. These leaders learn to adopt a particularly open and curious mindset, and adhere to a systematic process for cracking even the most inscrutable problems. They’re terrific problem solvers under any conditions. And when conditions of uncertainty are at their peak, they’re at their brilliant best.

Six mutually reinforcing approaches underly their success: (1) being ever-curious about every element of a problem; (2) being imperfectionists , with a high tolerance for ambiguity; (3) having a “dragonfly eye” view of the world, to see through multiple lenses; (4) pursuing occurrent behavior and experimenting relentlessly; (5) tapping into the collective intelligence , acknowledging that the smartest people are not in the room; and (6) practicing “show and tell” because storytelling begets action (exhibit).

Here’s how they do it.

1. Be ever-curious

As any parent knows, four-year-olds are unceasing askers. Think of the never-ending “whys” that make little children so delightful—and relentless. For the very young, everything is new and wildly uncertain. But they’re on a mission of discovery, and they’re determined to figure things out. And they’re good at it! That high-energy inquisitiveness is why we have high shelves and childproof bottles.

When you face radical uncertainty, remember your four-year-old or channel the four-year-old within you. Relentlessly ask, “Why is this so?” Unfortunately, somewhere between preschool and the boardroom, we tend to stop asking. Our brains make sense of massive numbers of data points by imposing patterns that have worked for us and other humans in the past. That’s why a simple technique, worth employing at the beginning of problem solving, is simply to pause and ask why conditions or assumptions are so until you arrive at the root of the problem. 1 This approach was originally developed by Sakichi Toyoda, the founder of Toyota.

Natural human biases in decision making, including confirmation, availability, and anchoring biases, often cause us to shut down the range of solutions too early. 2 Daniel Kahneman, Thinking, Fast and Slow , New York, NY: Farrar, Straus and Giroux, 2011. Better—and more creative—solutions come from being curious about the broader range of potential answers.

One simple suggestion from author and economist Caroline Webb to generate more curiosity in team problem solving is to put a question mark behind your initial hypotheses or first-cut answers. This small artifice is surprisingly powerful: it tends to encourage multiple solution paths and puts the focus, correctly, on assembling evidence. We also like thesis/antithesis, or red team/blue team, sessions, in which you divide a group into opposing teams that argue against the early answers—typically, more traditional conclusions that are more likely to come from a conventional pattern. Why is this solution better? Why not that one? We’ve found that better results come from embracing uncertainty. Curiosity is the engine of creativity.

We have to be comfortable with estimating probabilities to make good decisions, even when these guesses are imperfect. Unfortunately, we have truckloads of evidence showing that human beings aren’t good intuitive statisticians.

2. Tolerate ambiguity—and stay humble!

When we think of problem solvers, many of us tend to picture a poised and brilliant engineer. We may imagine a mastermind who knows what she’s doing and approaches a problem with purpose. The reality, though, is that most good problem solving has a lot of trial and error; it’s more like the apparent randomness of rugby than the precision of linear programming. We form hypotheses, porpoise into the data, and then surface and refine (or throw out) our initial guess at the answer. This above all requires an embrace of imperfection and a tolerance for ambiguity—and a gambler’s sense of probabilities.

The real world is highly uncertain. Reality unfolds as the complex product of stochastic events and human reactions. The impact of COVID-19 is but one example: we address the health and economic effects of the disease, and their complex interactions, with almost no prior knowledge. We have to be comfortable with estimating probabilities to make good decisions, even when these guesses are imperfect. Unfortunately, we have truckloads of evidence showing that human beings aren’t good intuitive statisticians. Guesses based on gut instinct can be wildly wrong. That’s why one of the keys to operating in uncertain environments is epistemic humility, which Erik Angner defines as “the realization that our knowledge is always provisional and incomplete—and that it might require revision in light of new evidence.” 3 Erik Angner, “Epistemic humility—knowing your limits in a pandemic,” Behavioral Scientist , April 13, 2020, behavioralscientist.org.

Recent research shows that we are better at solving problems when we think in terms of odds rather than certainties. 4 Annie Duke, Thinking in Terms of Bets: Making Smarter Decisions When You Don’t Have All the Facts , New York, NY: Portfolio/Penguin, 2018. For example, when the Australian research body Commonwealth Scientific and Industrial Research Organisation (CSIRO), which owned a core patent on the wireless internet protocol, sought royalties from major companies, it was initially rebuffed. The CSIRO bet that it could go to court to protect its intellectual property because it estimated that it needed only 10 percent odds of success for this to be a good wager, given the legal costs and likely payoff. It improved its odds by picking the weakest of the IP violators and selecting a legal jurisdiction that favored plaintiffs. This probabilistic thinking paid off and eventually led to settlements to CSIRO exceeding $500 million. 5 CSIRO briefing to US Government, December 5, 2006. A tolerance for ambiguity and a willingness to play the odds helped the organization feel its way to a good solution path.

To embrace imperfectionism with epistemic humility, start by challenging solutions that imply certainty. You can do that in the nicest way by asking questions such as “What would we have to believe for this to be true?” This brings to the surface implicit assumptions about probabilities and makes it easier to assess alternatives. When uncertainty is high, see if you can make small moves or acquire information at a reasonable cost to edge out into a solution set. Perfect knowledge is in short supply, particularly for complex business and societal problems. Embracing imperfection can lead to more effective problem solving. It’s practically a must in situations of high uncertainty, such as the beginning of a problem-solving process or during an emergency.

Good problem solving typically involves designing experiments to reduce key uncertainties. Each move provides additional information and builds capabilities.

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3. take a dragonfly-eye view.

Dragonfly-eye perception is common to great problem solvers. Dragonflies have large, compound eyes, with thousands of lenses and photoreceptors sensitive to different wavelengths of light. Although we don’t know exactly how their insect brains process all this visual information, by analogy they see multiple perspectives not available to humans. The idea of a dragonfly eye taking in 360 degrees of perception 6 Philip Tetlock and Dan Gardner, Superforecasting: The Art and Science of Prediction , New York, NY: Crown, 2015. is an attribute of “superforecasters”—people, often without domain expertise, who are the best at forecasting events.

Think of this as widening the aperture on a problem or viewing it through multiple lenses. The object is to see beyond the familiar tropes into which our pattern-recognizing brains want to assemble perceptions. By widening the aperture, we can identify threats or opportunities beyond the periphery of vision.

Consider the outbreak of HIV in India in the early 1990s—a major public-health threat. Ashok Alexander, director of the Bill & Melinda Gates Foundation’s India Aids Initiative, provided a brilliant example of not just vision but also dragonfly vision. Facing a complex social map with a rapidly increasing infection rate, he widened the problem’s definition, from a traditional epidemiological HIV transmission model at known “hot spots,” to one in which sex workers facing violence were made the centerpiece.

This approach led to the “Avahan solution,” which addressed a broader set of leverage points by including the sociocultural context of sex work. The solution was rolled out to more than 600 communities and eventually credited with preventing 600,000 infections. The narrow medical perspective was sensible and expected, but it didn’t tap into the related issue of violence against sex workers, which yielded a richer solution set. Often, a secret unlocks itself only when one looks at a problem from multiple perspectives, including some that initially seem orthogonal.

The secret to developing a dragonfly-eye view is to “anchor outside” rather than inside when faced with problems of uncertainty and opportunity. Take the broader ecosystem as a starting point. That will encourage you to talk with customers, suppliers, or, better yet, players in a different but related industry or space. Going through the customer journey with design-thinking in mind is another powerful way to get a 360-degree view of a problem. But take note: when decision makers face highly constrained time frames or resources, they may have to narrow the aperture and deliver a tight, conventional answer.

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4. pursue occurrent behavior.

Occurrent behavior is what actually happens in a time and place, not what was potential or predicted behavior. Complex problems don’t give up their secrets easily. But that shouldn’t deter problem solvers from exploring whether evidence on the facets of a solution can be observed, or running experiments to test hypotheses. You can think of this approach as creating data rather than just looking for what has been collected already. It’s critical for new market entry—or new market creation. It also comes in handy should you find that crunching old data is leading to stale solutions.

Most of the problem-solving teams we are involved with have twin dilemmas of uncertainty and complexity, at times combined as truly “wicked problems.” 7 A term coined in a now famous 1973 article: Horst W. J. Rittel and Melvin Webber, “Dilemmas in a general theory of planning,” Policy Sciences , 1973, Number 4, pp. 155–69. For companies ambitious to win in the great unknown in an emerging segment—such as electric cars or autonomous vehicles, where the market isn’t fully established—good problem solving typically involves designing experiments to reduce key uncertainties, not just relying on existing data. Each move (such as buying IP or acquiring a component supplier) and each experiment (including on-road closed tests) not only provides additional information to make decisions but also builds capabilities and assets that support further steps. Over time, their experiments, including alliances and acquisitions, come to resemble staircases that lead to either the goal or to abandonment of the goal. Problem-solving organizations can “bootstrap” themselves into highly uncertain new spaces, building information, foundational assets, and confidence as they take steps forward.

Risk-embracing problem solvers find a solution path by constantly experimenting. Statisticians use the abbreviation EVPI—the expected value of perfect information—to show the value of gaining additional information that typically comes from samples and experiments, such as responses to price changes in particular markets. A/B testing is a powerful tool for experimenting with prices, promotions, and other features and is particularly useful for digital marketplaces and consumer goods. Online marketplaces make A/B testing easy. Yet most conventional markets also offer opportunities to mimic the market’s segmentation and use it to test different approaches.

The mindset required to be a restless experimenter is consistent with the notion in start-ups of “failing fast.” It means that you get product and customer affirmation or rejection quickly through beta tests and trial offerings. Don’t take a lack of external data as an impediment—it may actually be a gift, since purchasable data is almost always from a conventional way of meeting needs, and is available to your competitors too. Your own experiments allow you to generate your own data; this gives you insights that others don’t have. If it is difficult (or unethical) to experiment, look for the “natural experiments” provided by different policies in similar locations. An example would be to compare outcomes in twin cities, such as Minneapolis–St. Paul.

It’s a mistake to think that your team has the smartest people in the room. They aren’t there. They’re invariably somewhere else. Nor do they need to be there if you can access their intelligence via other means.

5. Tap into collective intelligence and the wisdom of the crowd

Chris Bradley, a coauthor of Strategy Beyond the Hockey Stick , 8 Chris Bradley, Marin Hirt, and Sven Smit, Strategy Beyond the Hockey Stick: People, Probabilities, and Big Moves to Beat the Odds , Hoboken, NJ: Wiley, 2018. observed that “it’s a mistake to think that on your team you have the smartest people in the room. They aren’t there. They’re invariably somewhere else.” 9 For more from Chris Bradley, in a conversation with Rob McLean, see “ Want better strategies? Become a bulletproof problem solver ,” August 2019. Nor do they need to be there if you can access their intelligence via other means. In an ever-changing world where conditions can evolve unpredictably, crowdsourcing invites the smartest people in the world to work with you. For example, in seeking a machine-learning algorithm to identify fish catch species and quantities on fishing boats, the Nature Conservancy (TNC) turned to Kaggle and offered a $150,000 prize for the best algorithm. This offer attracted 2,293 teams from all over the world. TNC now uses the winning algorithm to identify fish types and sizes caught on fishing boats in Asia to protect endangered Pacific tuna and other species.

Crowdsourced problem solving is familiar in another guise: benchmarking. When Sir Rod Carnegie was CEO of Conzinc Riotinto Australia (CRA), he was concerned about the costs of unscheduled downtime with heavy trucks, particularly those requiring tire changes. He asked his management team who was best in the world at changing tires; their answer was Formula One, the auto racing competition. A team traveled to the United Kingdom to learn best practice for tire changes in racetrack pits and then implemented what it learned thousands of miles away, in the Pilbara region of Western Australia. The smartest team for this problem wasn’t in the mining industry at all.

Of course, while crowdsourcing can be useful when conventional thinking yields solutions that are too expensive or incomplete for the challenge at hand, it has its limitations. Good crowdsourcing takes time to set up, can be expensive, and may signal to your competitors what you are up to. Beware of hidden costs, such as inadvertently divulging information and having to sieve through huge volumes of irrelevant, inferior suggestions to find the rare gem of a solution.

Accept that it’s OK to draw on diverse experiences and expertise other than your own. Start with brainstorming sessions that engage people from outside your team. Try broader crowdsourcing competitions to generate ideas. Or bring in deep-learning talent to see what insights exist in your data that conventional approaches haven’t brought to light. The broader the circles of information you access, the more likely it is that your solutions will be novel and creative.

Rookie problem solvers show you their analytic process and math to convince you they are clever. Seasoned problem solvers show you differently.

6. Show and tell to drive action

We started our list of mindsets with a reference to children, and we return to children now, with “show and tell.” As you no doubt remember—back when you were more curious!—show and tell is an elementary-school activity. It’s not usually associated with problem solving, but it probably piqued your interest. In fact, this approach is critical to problem solving. Show and tell is how you connect your audience with the problem and then use combinations of logic and persuasion to get action.

The show-and-tell mindset aims to bring decision makers into a problem-solving domain you have created. A team from the Nature Conservancy, for instance, was presenting a proposal asking a philanthropic foundation to support the restoration of oyster reefs. Before the presentation, the team brought 17 plastic buckets of water into the boardroom and placed them around the perimeter. When the foundation’s staff members entered the room, they immediately wanted to know what the buckets were for. The team explained that oyster-reef restoration massively improves water quality because each oyster filters 17 buckets of water per day. Fish stocks improve, and oysters can also be harvested to help make the economics work. The decision makers were brought into the problem-solving domain through show and tell. They approved the funding requested and loved the physical dimension of the problem they were part of solving.

Rookie problem solvers show you their analytic process and mathematics to convince you that they are clever. That’s sometimes called APK, the anxious parade of knowledge. But seasoned problem solvers show you differently. The most elegant problem solving is that which makes the solution obvious. The late economist Herb Simon put it this way: “Solving a problem simply means representing it so as to make the solution transparent.” 10 Herbert Simon, The Sciences of the Artificial , Cambridge, MA: MIT Press, 1969.

To get better at show and tell, start by being clear about the action that should flow from your problem solving and findings: the governing idea for change. Then find a way to present your logic visually so that the path to answers can be debated and embraced. Present the argument emotionally as well as logically, and show why the preferred action offers an attractive balance between risks and rewards. But don’t stop there. Spell out the risks of inaction, which often have a higher cost than imperfect actions have.

The mindsets of great problem solvers are just as important as the methods they employ. A mindset that encourages curiosity, embraces imperfection, rewards a dragonfly-eye view of the problem, creates new data from experiments and collective intelligence, and drives action through compelling show-and-tell storytelling creates radical new possibilities under high levels of unpredictability. Of course, these approaches can be helpful in a broad range of circumstances, but in times of massive uncertainty, they are essential.

Charles Conn is an alumnus of McKinsey’s Sydney office and is a board member of Patagonia and former CEO of the Rhodes Trust. Robert McLean is an alumnus of the Sydney office and is the advisory-board chair of the Nature Conservancy Australia. They are the authors of Bulletproof Problem Solving: The One Skill That Changes Everything (Wiley, 2018).

This article was edited by David Schwartz, an executive editor in the Tel Aviv office.

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Loan or Investment Formulas

Summary: Compound interest can work for you or against you. Whether you’re taking out a loan or making an investment , either way it’s the same set of formulas. This page gives you the formulas, shows where they came from, and works through lots of examples. Excel workbooks are also provided.

Just the Formulas, Ma’am

Some variables, the master formula, payment amount, number of payments, original amount, interest rate, payment amount for an investment, number of payments for an investment, other streams of payments, excel workbooks, ti-83/84 calculator, online calculator.

“Don’t make me wade through all that algebra,” I hear you yell. “Just give me the formulas!” Here ya go; there’s also an Excel workbook available for download. (These formulas weren’t brought down from heaven by an archangel. If you want to see the derivations, which aren’t really all that hard, they’re given later in this page.)

All formulas apply when payments are made at the end of each period , and please understand that results are approximate . The variable names should be pretty straightforward, but I explain them below .

If payments are made at the beginning of each period , then esentially you have N−1 payments on a principal of A−P. In words: before substituting in the formulas you subtract 1 from the number of payments, and you subtract one payment amount from the principal. This works because the end of each period is the start of the next period.

Introduction

Fairly often in the newsgroup alt.algebra.help , queries like this one were posted:

I was hoping someone could provide me with the formula for determining compounding interest problems. I have a formula, but I’m not sure what numbers plug in where. Help. This is as far as I understand: T=P(1+i)^n

Another perennial favorite:

How much must I pay into a savings account every month to accumulate $200,000 in ten years, if the account pays 5%?

Finally, here’s a question I hope you get to ask one day:

I just won the lottery. The prize is $26 million, paid as $1.3 million a year; or I can take a lump sum of $16 million. What should I do?

These are various forms of the present value, future value, and annuity problems . They all have to do with an investment or a stream of payments, and how the value changes over time. To update the old saying slightly, “A bird in the hand is worth 1.06 in the bush.”

The general idea is that there are two things going on at the same time in a loan or an investment:

This page will develop the formulas to solve all sorts of present-value or future-value problems. These cover loans, savings accounts and other investments, mortgages, and annuities. As you’ll see, though there are lots of names for these problems they’re really all the same thing looked at from different angles.

Because loans seem to be the most popular problems, I’ll start with them. After that, I’ll adapt the formulas for other sorts of future-value problems. For example, a loan is the mirror image of making an initial big deposit in a savings account and then drawing out a constant sum every month until there’s nothing left. The total of all payments/withdrawals will eventually reach the total of the initial loan/deposit plus accrued interest.

The formulas and examples in this page are all valid algebraically, but they should be considered as just approximations financially.

For example, you might compute a payment amount of $65.4321. Obviously it’s not possible to make a payment to greater precision than one cent, so you’ll be paying either $65.43 or $65.44 a month. Either way the next month’s balance will be slightly different from what you might compute from the formula. Over time, these differences may either grow or cancel themselves out.

Therefore, in a real loan situation you should probably expect to see minor discrepancies from the results of the computations here.

Beyond mere rounding, you may also find differences because financial institutions apply traditional or creative accounting techniques such as the “rule of 78” or the 360/365 rule. Your best protection is to read all documents carefully and, if necessary, use the formulas on this page to check the figures you’re given.

If you haven’t spent much time in alt.algebra.help , you may be puzzled by the caret (^) in some of the formulas that follow. caret is pronounced “to the power of”. Yes, HTML does support superscripts; but not everyone’s browser renders them clearly, and I understand that some systems for the visually impaired also don’t distinguish them.

All of these problems assume that the payment amounts are all equal , except possibly for an initial or final payment that is different. It’s possible to solve problems with unequal payments, but the calculations are quite a lot messier; for that sort of problem a spreadsheet is your best tool.

The method I’ll use for solving these problems is to come up with a formula for B_n, the loan balance after n payments. Then a few transformations of that formula will show how to solve for the other variables.

To work out that formula for B_n, what I’ll do is figure the balance at the end of the first period, second period, and maybe a couple more, and look for a pattern.

When the loan is first taken out , no payments have been made, so the loan balance is the same as the loan amount:

What happens at the end of the first period ? Interest has accrued. The interest rate per period is i, and the balance is B_0, so the accrued interest is i times B_0, which equals iA; this gets added to the loan balance. On the other hand, the payment P is subtracted. Therefore:

What happens to the loan balance at the end of the second period ? We add in the interest on the previous balance, which is i times B_1, and subtract the next payment P:

This process repeats at the end of each period: add in the accrued interest and subtract the payment . I won’t show all the steps for B_4, but you should be able to work them out for yourself.

Now we have enough information to write a general expression for B_n, the loan balance after the nth payment. Look at the first term in B_0, B_1, B_2, B_3, B_4: it’s always A times the nth power of (1+i). (Remember that (1+i)^0 = 1, so A = A(1+i)^0.) This gives us for a start:

The first part of this formula is known as the future value of the principal sum A. It reflects the fact that money grows in value over time. The second part, the “something”, is the effect of the payments. Their value also grows over time; or, to put it another way, a payment made early has more effect toward paying off the loan than the same amount paid later.

Now let’s look at the “something”, the remaining terms. We can summarize them as

This is a geometric series, as becomes clear if we write in the implied exponent of 1 and use the fact that P = P(1+i)^0:

which means that the complete formula is

This master formula relates the balance B_n after n periods, the original amount A, the payment P, and the interest rate i per period. It’s also used in the Excel workbook that accompanies this page.

Everything else will derive from that master formula. So if you need to memorize formulas, this is the only one you need to memorize.

If you know the interest rate i, loan amount A, and payment P, you can use equation 1 to find the current balance remaining after n payments. This is sometimes called the payoff amount . (In bygone days, the actual payoff amount was frequently greater than that, owing to the “rule of 78”. But in the U.S. in recent years the truth-in-lending laws have made the rule of 78 and other prepayment penalties much less common.)

You have a $18,000 car loan at 14.25% for 36 months. You have just made your 24th payment of $617.39 and would like to know the payoff amount.

Solution: 14.25% interest a year is 1.1875% per month, so i = 0.011875. Substitute P = 617.39, A = 18000, n = 24 into equation 1 to solve for the current balance:

B_n = A(1+i)^n − (P/i)[(1+i)^n − 1]

B_n = 18000*1.011875^24 − (617.39/0.011875)(1.011875^24−1)

B_n = 6866.97

After 24 months, which is 2/3 or 67% of the loan term, you’ve paid off only 62% of the loan. That’s the effect of the accrued interest, and it’s even more lopsided for longer loans, as you’ll see in example 2 .

Finding Other Loan Numbers

Equation 1 showed how to find the current balance, or payoff amount, on a loan. But more likely you want to know what the payment amount will be for a certain number of payments, or how many payments of a certain amount will be required. The most obvious times when you’d ask these questions are when you’re buying a car on a 3-year or 4-year loan (or longer), or a house on a 30-year loan.

The next two sections show how you can find both the number of payments N and the payment amount P by doing some algebra on equation 1 . When the loan is paid off, the remaining balance B_n = 0, so set B_N to 0 in equation 1 and solve for either P or N.

Let’s solve first for P.

B_N = 0 after the final (Nth) payment at the end of the loan, and therefore

Multiply top and bottom by (1+i)^-N to simplify:

There used to be published tables of (1+i)^-N for many increments of i and N. Nowadays, of course, we just punch up the numbers on the calculator, and the answer pops out. You can also use the Excel workbook that accompanies this page.

You are buying a $250,000 house, with 10% down, on a 30-year mortgage at a fixed rate of 7.8%. What is the monthly payment?

Solution: 30 years is 360 months, and the monthly interest rate is 7.8%/12, or 0.0065. The loan amount is 90% of $250,000, which is $225,000. Substitute in equation 2 :

P = iA / [1 − (1+i)^-N]

P = 0.0065*225000 / [1 − 1.0065^-360]

P = 1619.708627 → $1619.71 is the monthly payment

The bank will normally round a loan payment up to the next penny, or even the next dollar, leaving the last payment to be slightly smaller than the rest.

By the way, it can be interesting (and horrifying) to compute B_12, the loan balance after the first year’s payments on that loan. Using equation 1 , you’ll find that

B_12 = 223044.55

You’ve made payments of $19,436.52 (12 times 1619.71), but not even $2000 of that went to the principal of the loan. It’s a shocking fact that every homeowner faces at some point in a mortgage: during the first year practically all your payments go to interest.

Now you know to calculate the payment amount when the number of payments is predetermined. What about the other direction?

Suppose you predetermine the payment amount and need to know the number of payments? This is a less common situation, but here are two real-life examples:

Take the log of both sides:

And there you have it: the number of payments N on a loan of amount A with interest rate i and payment amount P . (You can use any logarithm base, as long as both logs use the same base.) You can also use the Excel workbook that accompanies this page.

Aunt Sally offers to lend you $3500 at 6% for that new home theater system you want. If you pay her back $100 a month, how long will it take?

Solution: 6% per year is 0.5% per month, or 0.005. P = 100 and A = 3500. Substitute in equation 3 :

N = −log(1−iA/P) / log(1+i)

N = −log(1−0.005*3500/100) / log(1.005)

N = −log(0.825)/log(1.005)

Any base of logarithms will give the same final answer, so use base-10 logs:

N = −(−0.083546)/(0.0021661)

You’ll pay Aunt Sally 38 payments of $100 each, and then a smaller final payment to finish the loan.

How much is that final payment? First find B_38, the loan balance after 38 payments. Use equation 1 to find that

B_38 = 56.83

You can either include that in your 38th payment or pay it separately as a 39th payment.

If you include it in the 38th payment, you will pay 37 monthly payments of $100.00 and a 38th payment of $156.83 .

If you make it a separate payment at the end of the 39th month, you’ll owe Aunt Sally 0.5% interest on the $56.83 for that month, so your final payment will be $56.83+(0.005×56.83) = $57.11. In that case you’ll pay Aunt Sally 38 payments of $100.00 and a 39th payment of $57.11 .

Suppose you pay Aunt Sally $15 a month instead of $100. How long will it take to pay off the loan then?

N = −log(1−0.005*3500/15) / log(1.005)

N = −log(−0.17)/log(1.005)

What’s up with that log of a negative number? Quite simply, at $15 a month you’ll never pay Aunt Sally off. The monthly interest on $3500 at 6% is 0.06×3500/12 = $17.50, so with a $15 payment your debt grows instead of shrinking.

The downloadable Excel workbook displays an error message if you enter impossible numbers like these into the computation of number of payments.

You have $15,000 in a 5% savings account, which is compounded monthly. How long will it take to run down the account if you withdraw $100 a month?

Solution: This is a straight loan from you to the bank: A = 15000; i = 5%/12 = .004167; P =100, and you need to find N. Use equation 3:

N = −log(1−.004167*15000/100) / log(1.004167)

You can take out $100 a month for 235 months (almost 20 years). Since N is not a whole number, there will be a little money left in the account after your 235th withdrawal. You can use equation 1 to find that B_235 = $88.56. So at the end of the 235th month you can close the account by withdrawing $188.56, or you can take only the $100 and close out the account at the end of the 236th month. In that case you will have earned interest of (5%÷12)×88.56 = $0.37, so you’ll receive $88.93 at the end of the 236th month .

By the way, the minus sign in equation 3 may look a bit strange: how can a number of payments be negative? Actually, it’s not. Since 1−iA/P is between 0 and 1, its logarithm will be negative, so negating it as in equation 3 gives a positive number N.

Huh? What? Don’t you know that? Well, maybe not. You may know what monthly payment you can afford, and about what interest rate you’d be paying. And from that, you want to know how big a purchase you can afford.

You’re looking to buy furniture for your living room. You can afford to pay about $60 a month over the next three years, and your credit card charges 16.9% interest. How much furniture can you buy?

Solution: P = 60, N = 36, and i = 16.9%/12 = 1.4083% = 0.014083. Use equation 4:

A = (P/i)[1 − (1+i)^-N]

A = (60/.014083)[1 − 1.014083^-36]

A = 1685.25

If you put the purchase on your credit card, at 16.9% interest you can afford to buy about $1685 worth of furniture.

Example 5a: But you have your eye on a set that’s on sale for $1850. The saleswoman offers you a store credit card with a special promotional rate of 12% for three years. Now can you afford the furniture?

A = (60/.01)[1 − 1.01^-36]

A = 1806.45

At 12% interest, you can afford $1806.45 ,`which`is`not`quite`enough.`But` fortunately the saleswoman works on commission and agrees to knock an extra $50 off the price. (I make up these stories, so I can throw in a happy ending if I want!)

This one, unfortunately, is trickier. Mathematicians say that there is no closed-form solution for interest rate, meaning that no straightforward formula exists to provide an exact solution with i on the left and other variables and functions on the right, in a finite number of steps. You can still find i, but you have to work for it. Here are several methods to choose from:

Newton’s Method

Newton’s Method has the advantage that it’s very fast. More precisely, Newton’s Method finds the interest rate very quickly if it can find it at all. Newton’s Method can fail if your initial guess for the interest rate is too outlandish, but in the real world that’s not a problem because you usually have some idea of the actual interest rate.

You can read all about Newton’s Method at Mathworld. But briefly, Newton’s Method requires you to rewrite one of the equations involving interest rate so that the right-hand side is 0; the left-hand side is then called f(i). You then take the derivative, f′(i), and make an initial guess at the interest rate. From that guess i you form the next guess i new by the equation

i new = i − f(i)/f′(i)

and you repeat until there’s no change from one guess to the next. Usually this happens in less than half a dozen iterations.

f(i) = P − P (1+i)^-N − iA

f′(i) = N P (1+i)^(-N-1) − A

The equation for successive guesses in Newton’s Method is therefore

You’re thinking about leasing an $11,200 car, attracted by the advertisements of “no down payment”. The lease payment is $291 a month for four years. What is the effective interest rate you’d be paying on this lease?

Solution: A = $11,200; P = $291; N = 4×12 = 48. Car loans in your area are quoted at around 12%, so start with i = 12%/year = .01/month. Using equation 8 , the equation to get each guess from the previous guess is

i new = i − [291 − 291(1+i)^-48 − 11200i] / [ 48×291(1+i)^-49 − 11200]

The computed guesses are 0.0094295242, 0.0094008156, 0.0094007411, 0.0094007411. Newton’s Method takes only four iterations to reach an answer of i = 0.0094007411 per month. Check that by substituting that in equation 2 —sure enough, we get P = $291.0000000. Therefore the annual rate is 12×0.94007411 = 11.28% .

Series Solution

Common opinion on Usenet has been that there’s no way to solve any of the first four equations for i, and that’s true enough if you’re looking for a closed-form solution. However, David Cantrell had the idea in late summer 2004 to apply reversion of series to equation 2 in his article A Series of Interest .

In an excellent example of academic integrity, after publishing his initial article Cantrell kept digging, found a 1963 article by H.E. Stelson in American Mathematical Monthly , and published a citation in a follow-up. My equation 7 is due entirely to Cantrell’s article, but I rearranged it slightly to simplify computation.

(In a further follow-up , Cantrell points out that the series converges when NP < 2A; in other words, when the total of all payments is less than double the principal. That is true for most loans, with the notable exception of home mortgages. For cases where the series does not converge, he offers a formula; see below .)

For background on reversion of series, see the Mathworld article Series Reversion .

Let’s repeat example 6 to compare this method against Newton’s Method . With P = 291, N = 48, and A =11200, I computed u = 0.005043732 and i = 0.0094015005. This is just a bit higher than the true answer of 0.009400741, which is not surprising given that the next term in the series would have a minus sign. Still, it’s probably accurate enough: substituting in equation 2 gives a payment of $291.0049718, which is $291.00 to the nearest penny.

Approximate Solution by Formula

In cases where NP ≥ 2A, David Cantrell’s series solution doesn’t converge. NP ≥ 2A means that the total paid (number of payments times payment amount) is more than double the principal amount. The most common example is a home mortgage.

He was kind enough to call my attention not only to this limitation of the series solution but to his article Finding Interest Rate without Approximation or Root-Finding . In that article he gave an original formula that he developed to approximate i in a wide range of situations, even where the series solution fails. I have rearranged that formula slightly and changed the variable letters for consistency with this page:

Let’s work example 6 one more time, to compare Cantrell’s approximation to the other solution methods. You’ll remember that Newton’s method got 0.94007411% a month or 11.28% a year, and the series solution got 0.94015005% a month, which is very slightly high, but still the same 11.28% a year to four significant figures.

To apply equation 9 , first compute q and then substitute it with the other quantities in the approximation for :

A = $11,200, P = $291, N = 48

q = log(1+1/48) / log(2) = 0.0297473434

q is just the base-2 logarithm of (1+1/N). Odds are your calculator can’t compute logs directly in base 2, so I’ve given the formula for changing the base of logarithms. It doesn't matter whether you use logs to base 10 or base e when computing q , as long as you use the same base for both logs. For the reasons, please see Changing the Base in my “ It’s the Law Too — the Laws of Logarithms ”.

i ≈ [ (1 + 291/11200)^(1/ q ) − 1 ]^ q − 1

i ≈ 0.93767347% a month or 11.25% a year

This is a bit lower than the other solutions, but still a good approximation considering that it’s much less work to obtain it.

But consider the situation in example 2 . Let’s modify that example and use the principal, payment, and term to find the interest rate:

A = $225,000, P = $1619.71, N = 360

Notice that the total paid is more than double the principal amount:

NP = $583095.60 and 2A = $450,000

As predicted, Cantrell’s series solution does not converge. If we calculate equation 7 anyway, here’s what happens:

u = (1619.71×360/225000−1) / (360+1) = 0.004408687

i = 162860.6214

Equation 7 is unusable because the series fails to converge. Let’s try equation 9 :

q = log(1+1/360)/log(2) = 0.0040019306

i ≈ [ (1 + 1619.71/225000)^(1/ q ) − 1 ]^ q − 1

i ≈ 0.64645769% a month or 7.7575% a year

This is a decent approximation to the actual interest rate of 7.8000% a year. It’s certainly better than 162,800% a month!

( Newton’s method , with an initial guess of 0.4% a month, gives the answer 0.65000073 in seven iterations. This is almost exactly 7.8% a year. So you get more accuracy, at the cost of more work.)

Solving an Investment or Annuity

Good news! These are just variations on the loan theme .

For instance, a savings account is just a loan from you to the bank. The difference is that payments can move in either direction: you call them deposits when they increase your balance and withdrawals when they decrease your balance. Because of the way P was originally defined, you count a withdrawal as a positive payment P and a deposit as a negative payment P.

At the end of every month, you put $100 into a mutual fund that pays 6%, compounded monthly. How much will you have at the end of five years?

Solution: P = $100, i = 6%/12 = .005, A = 0 (because you start with nothing in the account). Use equation 1 :

but reverse the sign of P in the formula, because the payments are going to increase the balance and not reduce it as in a loan.

B_n = A(1+i)^N + (P/i)[(1+i)^N − 1]

B_60 = 0 + (100/.005)(1.005^60 − 1)

B_60 = $6977.00

At the end of five years you’ll have $6977.00.

An annuity is a contract, usually with an insurance company, for you to receive a fixed amount of money at stated intervals, usually monthly. This is also the same as a loan, except that the payments move only one way.

Whole life insurance works this way once you cash it in: you can take the cash value of the insurance or use it to buy an annuity. You can also purchase the annuity with a lump sum. (An insurance annuity is typically more complicated, because it factors in your life expectancy. The payments are lower than they would otherwise be, because the company guarantees to pay you until you die, or to pay your heirs for the stated period if you die early. Here we’re just concerned with a straight annuity that pays for a definite period.)

You want to purchase a 20-year annuity that will pay $500 a month. If the guaranteed interest rate is 4%, how much will the annuity cost?

Solution: P = 500, i = 4%/12 = .00333 N = 20×12 = 240. Use equation 4:

A = (500/.00333)[1 − 1.00333^-240]

A = $82,510.93

You need a one-time payment of $82,510.93 to fund the annuity. Since the total you’ll receive is $500×240 = $120,000, you might think you’re making out like a bandit. But even though it seems that way, this is just another illustration that the value of money grows over time, so that a smaller amount now is equivalent to a larger amount spread out over time.

The above example shows an ordinary annuity , one that pays at the end of each period. An annuity that pays at the beginning of each period is called an annuity due . As you’ll see in example 11 , you have to make some adjustments in the formulas when computing for an annuity due.

Suppose you have a goal, and you need to map out a plan for how to reach it. In other words, you know a future value F that you want to reach, by making N periodic payments P that earn interest i.

To find P or N in this situation, proceed almost like solving a loan . Take equation 1 , which for investments is

Now set A=0 and B_n=F (your desired future value), and solve for the future value F:

and solve for P or N. Let’s start by solving for P:

Note: As with all these formulas, this one assumes that you make each payment at the end of a period, so that you reach your goal on the day you make your last deposit.

You’re saving up for a down payment on a house. You expect to buy in about five years, and you’ll be looking in the $250,000 range. You need to make at least a 10% down payment, plus $2500 for closing costs. If your money fund pays 5.5%, posted and compounded every month, how much a month do you need to deposit?

Solution: N = 5×12 = 60; i = 5.5%/12 = .004583; F = 10% of $250,000 + $2500 = 27,500. Use equation 5 :

P = iF / [(1+i)^N − 1]

P = .004585*27500 / [(1.004583^60 − 1]

You need to put almost $400 a month into that money fund to meet your goal.

Suppose you need to meet an investment goal. You know how much a month you can save, and what interest you’ll earn. How long it will take to reach your goal?

To figure this, just solve equation 5 for N:

Take log of both sides (to any base):

On the same day every year, you put $2000 into stocks. If the market rises 8% a year, how many years will it take you to accumulate $40,000?

Solution: F = 40,000; P = 2000; i = .08. Use equation 6:

N = log(1+iF/P) / log(1+i)

N = log(1+.08*40000/2000)/log(1+.08)

N = log(2.6)/log(1.08)

Answer: You’ll pass your goal when you make the payment at the end of the 13th year.

Have you won the lottery? Congratulations! You’ll quickly find that the actual prize is less—much less—than advertised, because of the time value of money. For instance, $1 million a year for 20 years is worth a good deal less than $20 million now (not to mention the tax bite either way). How can you decide whether to take the lump-sum buyout you’ll be offered?

You’ve won the Freedonia State Lottery. The prize is $4 million in annual payments of $200,000. The state offers you a lump sum, in lieu of payments, of $3 million now. Should you take it? If you can figure the real interest rate, you can decide whether you should take the stream of payments, or take the lump sum and invest it yourself at a better rate.

If payments were at the end of each period, this would be straightforward: A = $3 million, P = $200,000, N = 20. But since the first $200,000 payment comes at the start of the first period, the 20th and last payment comes at the start of the 20th year, which is the end of the 19th year. So really you have N = 20−1 = 19. That first $200,000 payment, at the start of the first year, has to be handled separately. To keep the comparison correct, you also exclude that same $200,000 from the offered lump sum, so A = $3,000,000 − 200,000 = $2,800,000.

(A correspondent asked, “What happened to the first $200,000?” The answer is that nothing happened to it: either way you get that first $200,000 at the beginning of the stream of payments. If you take the lump sum, you also get the other $2,800,000, for a total of $3,000,000. If you take the stream of payments, you get $200,000 a year for 19 more years. So you’re not weighing $3,000,000 now against $4,000,000 in payments. Since either way you get the first $200,000 now, the difference between the plans is an extra $2,800,000 now versus 19 more payments of $200,000 later.)

So: A = $2,800,000, P = $200,000, N = 19. Let’s use Newton’s Method . Guess 10% as the initial interest rate, since the stock market sometimes does better than that. (This time the payments are annual, so you don’t divide by 12.) equation 8 becomes

i_new = [200000 − 200000 (1+i)^-19 − 2800000i] / [ 19×200000 (1+i)^-20 − 2800000]

and Newton’s method gives 0.0495777, 0.0358844, 0.0328139, 0.0325979, 0.0325968, 0.0325968. In six iterations we have about 3.26% as the interest rate implicit in the state’s offer of a lump sum. You conclude that you would do better to take the lump sum of $3 million and invest it yourself rather than to take the $4 million in payments over time. (This ignores the tax consequences of the choice. If you’re actually in this situation, consult a tax professional!)

For comparison, the series (my equation 7 ) finds u =0.0178571429, i = 0.0326109732, which gives P = $200,025. As you saw above, Newton’s Method took 6 iterations to find i = 0.0325967876, which gives P = $200000.

Now work the lottery example forward: suppose you invest the $3 million at 5%. How much could you get every year if you take $200,000 at the start of the first year?

P = .05 * 2,800,000 / [1 − 1.05^-19]

P = $231,686.03 a year (when i = 5%)

Two Excel workbooks are available for download.

In this workbook, the worksheets are all protected: use the Tab key to move through the input cells. The protection keeps you from accidentally deleting a formula, but you can unlock any worksheet by right-clicking on the tab and selecting Unprotect Sheet . No password is needed.

LoanAdLib2 (88 KB) is more general. Take it as a starting point, and modify whatever you need to: make the payments irregular or on a different schedule from the interest accrual, change interest rates in the middle of the loan, and so forth.

Caution: Depending on your Excel settings, you may get a warning about protected mode, or macro content, or both. Look for this below the Excel ribbon and above the worksheet. If you save the workbook to your computer, you should only have to click Enable Editing and Enable Macros once for each workbook.

For one specific case — frequency of payment different from the compounding period, which I understand is the norm in Canada — you can use this online Mortgage/Loan Calculator from the Government of Canada. You can find numerous others with a Web search for mortgage calculator Canada .

The TI-83 and TI-84 calculators come with a package of financial applications, including a “solver” for loan and investment problems. To access it, press [APPS] [1] [1] on most models, or [2nd] [x -1 ] [1] [1] on the original TI-83.

Timothy Mayes offers a detailed TI-84 Plus Tutorial on solving these loan and other financial problems.

Jaye Mosier has created a “pallet” of calculations using the formulas in this article. You can find it under the title Browns Loan or Investment Formulas .

Updates and new info: https://BrownMath.com/bsci/

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Find the best business loan rates (2023)

10 Common Cash-Flow Problems Facing Small Businesses

The cash that comes into your business is essential to keep it going, but companies often fall short on funds. Unfortunately, cash-flow problems are the top reason small businesses fail. Indeed, 82% of small businesses don’t succeed because they experience cash-flow issues, according to Visual Capitalist , an investment- and business-focused online publisher.

Don’t become a cash-flow problem statistic. Find out what the most common cash-flow challenges are so you can effectively manage or even avoid them.

What Are Cash-Flow Problems?

Cash-flow problems are when there isn’t enough money coming into a business to pay operational expenses or make necessary investments. Too much money is moving out of your business and not enough is moving into it.

What Are the Main Causes of Cash-Flow Problems for Small Businesses?

Many factors can cause cash-flow challenges for small businesses, some of which are outside your control, such as slow seasons, rising operational costs or higher priced goods. Cash-flow issues may also arise when a business is looking to expand but lacks enough capital to do so.

Not surprisingly, cash flow is the second most cited challenge small business owners are facing, according to a 2022 SCORE survey , right after getting customers. In fact, more than a third of business owners agree.

That said, cash-flow problems are often the result of common issues you can fix or avoid. Here are some of the most common sources of cash-flow problems for small businesses.

1. Inflation

Inflation has caused prices to go up for nearly everything. Businesses are spending more to maintain inventory and supplies. Utility costs are going up too, as are rent rates.

Additionally, inflation has led to increases in the prime rate , which equates to higher interest rates for credit cards and loans.

Inflation also affects consumer behavior, with many would-be buyers buckling down where they can, translating to fewer sales for businesses.

How to Solve the Problem:

While you can’t single-handedly rectify inflation, you can adjust your behaviors to push back. For example, see where you can reduce your expenses (e.g., subscriptions, office costs, travel).

Also, think about new ways to market yourself to attract buyers. For instance, you might offer special promotions to encourage spending or establish partnerships with other brands to drive more traffic to your business.

2. Supply-Chain Issues

Many businesses are experiencing a trickle-down effect of supply-chain issues on their cash flow. Ultimately, the longer it takes for businesses to get inventory or supplies needed to offer their services, the longer it takes to stock items they can sell or to take on new work. With product shipping delays, there’s less potential for cash to come into the business.

See how you can improve your inventory forecasts and better time your orders, taking into account longer logistics timelines. Also, consider buying in bulk for items you know you’ll need and use frequently. Additionally, while you want to maintain the quality of your product or service, think about ways to stretch the useful life of equipment and noncritical supplies to reduce ordering needs.

Need funds to purchase inventory and supplies?

3. ineffective receivables management and slow payments.

Another common cash-flow problem is inaccurate and inefficient accounting and slow invoice payments. Some small businesses use outdated technologies or even pen and paper to keep track of their books and manage their receivables.

If you’re still using paper invoices and accepting checks, which can take some time to clear, it may be time to upgrade. Instead of using a paper invoice, invoice electronically and make it clear that payment is due at a specific time.

Thanks to the widespread adoption of payment-processing technologies , slow invoice payments are becoming less and less of a cash-flow management problem. Indeed, credit cards , debit cards and other types of electronic fund transfers are much faster and more reliable. They also create a record of the funds you’ve received.

4. Overspending

It can be difficult to determine which investments are essential to your business. If you don’t plan accordingly, you could over-invest and go over budget. Businesses that overspend on software, office space and perks will often run into cash-flow problems.

The business services landscape is changing all the time. Some solutions may become obsolete, and others may seem like a good idea at first but don’t turn out to provide any value. Unfortunately, it isn’t uncommon for small businesses to get locked into contractual agreements with companies that don’t provide a return on investment.

Your first step should be establishing a spending budget based on cash flow. This will help you set a baseline for your spending habits. Then, create a plan for your spending. For example, if you intend to invest in a new software environment, map out beforehand how each piece of software will work together to drive value.

Graphic of a storefront with a faucet at the top and a dollar sign coming out with wilted flowers all around

5. Overestimating Future Sales

If your sales numbers have been on an upward trend for months, it can be tempting to assume they’ll stay that way. Some small businesses run into cash-flow problems because they wager the sales they expect tomorrow to fund the investments they want to make today.

This is a risky strategy. You can’t guarantee future sales; sometimes, a sunny perspective can cloud your judgment.

Because you need a sales forecast to create a business plan, make sure your estimates are based on past data if you have it. Break down your sales into unit parts, and use averages to keep your sales estimates realistic.

6. Bad Pricing Models

Pricing products and services is one of the most challenging components of running a small business. While it can be relatively easy to determine pricing if you’re selling commodities or consumer goods, it gets fuzzy when you’re selling a unique service or product.

If you price too high, you could spook buyers. If you price too low, you could miss out on revenue. Both problems will impact your cash flow.

To get the pricing right, pay attention to your competitors and any factors that may affect your market. You don’t necessarily want to undercut your competitors’ prices, especially if your product is superior. But you’ll need to keep your price attainable for your target market if you want to make sales.

Infographic illustrating common cash-flow problems in business, such as overspending, seasonal challenges and supply-chain issues, among others

7. Poor Employee Management

Employee salaries and wages are a large part of your outgoing expenses. Therefore, poor employee management can lead to cash-flow problems — and possibly layoffs.

For example, if you rely on shift workers to operate your business, overbooking employee shifts could lead to unnecessary expenses that don’t translate into returns. High rates of employee turnover, job redundancies and a lack of automation also come with avoidable costs.

One of the best ways to avoid cash-flow problems like these is to cross-train employees to fill more roles as needed in your business. If you’re losing employees quickly and often, create more favorable working conditions to reduce turnover. Also, introduce new technology to automate repetitive processes and do more with less manpower.

8. Seasonal Challenges

Many small businesses are affected by seasonal changes in sales and revenue, which impact cash flow. Businesses that sell consumer goods, for example, can expect increased sales during the holiday season and slower sales during other times of the year.

The best way to avoid cash-flow problems that are seasonal is to plan your investments accordingly. Use data from past years to plan how you spend and save cash.

9. Inadequate Cash Reserves

Every business should maintain a cash reserve to cover expenses during slow or difficult times. Without one, you might need to turn to investors for capital, which might require you to give up equity, or you might apply for debt financing to cover costs.

To create a cash reserve, determine how much you spend each month. If you operate a seasonal business, calculate your expenses for different times of the year and use the most expensive season as a model. Then, put money aside incrementally until you have a safety net.

The size of your reserve depends on what makes you comfortable. Many financial experts recommend consumers put aside emergency funds to cover 3-6 months of expenses.

10. Difficulties in Obtaining Financing

Many small businesses depend on financing products, such as business loans and lines of credit , to operate and expand. However, obtaining financing may be difficult for some companies, resulting in a serious cash-flow problem.

A business owner could be denied a business loan for various reasons, including bad credit , no credit or inadequate collateral. Additionally, many banks won’t approve a business loan to be used to address cash-flow problems as the business is showing signs of financial strain.

If you’re denied a business loan or a line of credit, your best move is to find out why and work to remedy this issue. It can take time to build credit, but you can also try to cut costs to increase cash flow or make changes to your business plan to make it stronger.

You can also look for alternatives to conventional financing, such as an online marketplace. Some business loans are available even to businesses with bad credit, and some online lenders consider factors other than credit ratings to determine if a company qualifies for financing.

Has your credit seen better days?

How to manage cash-flow problems in your business.

Every business faces difficult financial times at some point. However, you can take plenty of cost-cutting measures to fix cash-flow problems. Sometimes, an adjustment in business strategy is all you need to stay cash- positive . Other times, you might perform a cost/benefit analysis to see if a business loan can help .

At the end of the day, with the right steps, you can get through your cash-flow challenges and keep your business growing.

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What is a Problem Loan?

Understanding problem loans, how institutions can identify problem loans, options to rectify a problem loan, problem loan.

A problem credit or an impaired asset

A problem loan is often referred to as a problem credit , or an impaired asset since, counterintuitively, loans are an asset for a creditor (as opposed to a liability for the borrower).

In simple terms, a problem loan is one that poses a “challenge” for a lender. It may occur when the borrower ceases to make interest or principal payments (delinquency) or where repayment of the loan, as per the terms of the credit agreement, becomes otherwise less likely.

Problem loans are specific to a borrower’s loan(s) or its risk rating with the financial institution. A problem loan is not the same as a “problem borrower,” which may include poor communication with their relationship team or reputational risk for the lender, among other things.

Some of the causes of a problem loan include (but are not limited to) delinquency (a missed payment), an expired or deteriorating risk rating, a covenant breach (either technical or financial), or by virtue of a loan reaching its maturity without being renewed. All of these characteristics make full repayment, or full recovery, much less likely. They also often impact a lender’s profitability, as the firm may be required to hold more capital against the impaired asset(s).

Federal regulators in the United States use two categories to “risk grade” problem loans. These are:

Lending is a very low-margin business, meaning that firms must extend high volumes of credit in order to make meaningful revenue. After accounting for the cost of funds, operating expenses , and provisions for credit loss, net margins are even tighter still. Maintaining a low proportion of problem loans is paramount for a lender to be able to operate profitably, which is why banks work through considerable qualitative and quantitative due diligence for prospective borrowers.

Once credit is extended, however, the due diligence process is not over; ongoing monitoring – at least annually, but sometimes quarterly or even monthly – is an important part of maintaining a healthy credit portfolio.

Monitoring tools include, but are not limited to:

Experienced loan officers and credit analysts can often identify potential problem loans more quickly by observing patterns of behavior by management (like a high dividend payout ratio ) or weak internal controls (like slow collections or inadequate oversight of account access).

Clients exhibiting problem loan characteristics are not usually forced into liquidation right away. There are widely believed to be five reasonable options when approaching a potential problem loan. These are:

Each alternative presents advantages and disadvantages to one of the two parties (either the borrower or the lender). In general, seeking a workout solution is (arguably) the only “win-win” alternative.

Sometimes a borrower starts to demonstrate problem loan characteristics, but reporting is in order, and the loan is performing. A lender may wish to monitor that borrower more closely before making a decision about the final outcome. In such instances, they will typically use what’s called a watch report .

The watch process requires more robust interim reporting by the client, which helps the relationship team highlight the most important borrower characteristics and credit-specific information that senior risk managers need in order to stay up to speed on the client’s progress towards more stable operations.

If you are interested in learning more about Problem Loans, we recommend CFI’s Problem Loans Course . This course examines the unique challenges these loans present for a financial institution and how lenders can be more proactive in identifying potential problem loans.

Thank you for reading CFI’s guide to Problem Loans. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

How to Solve Problems

Laura Amico

To bring the best ideas forward, teams must build psychological safety.

Teams today aren’t just asked to execute tasks: They’re called upon to solve problems. You’d think that many brains working together would mean better solutions, but the reality is that too often problem-solving teams fall victim to inefficiency, conflict, and cautious conclusions. The two charts below will help your team think about how to collaborate better and come up with the best solutions for the thorniest challenges.

First, think of the last time you had to solve a problem. Maybe it was a big one: A major trade route is blocked and your product is time sensitive and must make it to market on time. Maybe it was a small one: A traffic jam on your way to work means you’re going to be late for your first meeting of the day. Whatever the size of the impact, in solving your problem you moved through five stages, according to “ Why Groups Struggle to Solve Problems Together ,” by Al Pittampalli.

Pittampalli finds that most of us, when working individually, move through these stages intuitively. It’s different when you’re working in a team, however. You need to stop and identify these different stages to make sure the group is aligned. For example, while one colleague might join a problem-solving discussion ready to evaluate assumptions (Stage 3), another might still be defining the problem (Stage 1). By defining each stage of your problem-solving explicitly, you increase the odds of your team coming to better solutions more smoothly.

This problem-solving technique gains extra power when applied to Alison Reynold’s and David Lewis’ research on problem-solving teams. In their article, “ The Two Traits of the Best Problem-Solving Teams ,” they find that highly effective teams typically have a pair of common features: They are cognitively diverse and they are psychologically safe. They also exhibit an array of characteristics associated with learning and confidence; these teammates tend to be curious, experimental, and nurturing, for example.

As you and your colleagues consider these ideas, think about the last problem you had to solve as a team. First, map out what you remember from each step of your problem-solving. Were all of you on the same page at each stage? What aspects of the problem did you consider — or might you have missed — as a result? What can you do differently the next time you have a problem to solve? Second, ask where your team sees themselves on the chart. What kinds of behaviors could your team adopt to help you move into that top-right quadrant?

Laura Amico is a senior editor at Harvard Business Review.

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10 Step Process for Effective Business Problem Solving

Posted august 3, 2021 by harriet genever.

Navigate uncertainty by following this 10-step process to develop your problem-solving skills and approach any issue with confidence.

When you start a small business or launch a startup, the one thing you can count on is the unexpected. No matter how thoroughly you plan, forecast , and test, problems are bound to arise. This is why as an entrepreneur, you need to know how to solve business problems effectively.

What is problem solving in business?

Problem solving in business relates to establishing processes that mitigate or remove obstacles currently preventing you from reaching strategic goals . These are typically complex issues that create a gap between actual results and your desired outcome. They may be present in a single team, operational process, or throughout your entire organization, typically without an immediate or obvious solution.

To approach problem solving successfully, you need to establish consistent processes that help you evaluate, explore solutions, prioritize execution, and measure success. In many ways, it should be similar to how you review business performance through a monthly plan review . You work through the same documentation, look for gaps, dig deeper to identify the root cause, and hash out options. Without this process, you simply cannot expect to solve problems efficiently or effectively.

Why problem solving is important for your business

While some would say problem-solving comes naturally, it’s actually a skill you can grow and refine over time. Problem solving skills will help you and your team tackle critical issues and conflicts as they arise. It starts from the top. You as the business owner or CEO needing to display the type of level-headed problem solving that you expect to see from your employees.

Doing so will help you and your staff quickly deal with issues, establish and refine a problem solving process, turn challenges into opportunities, and generally keep a level head. Now, the best business leaders didn’t just find a magic solution to solve their problems, they built processes and leveraged tools to find success. And you can do the same.

By following this 10-step process, you can develop your problem-solving skills and approach any issue that arises with confidence.

1. Define the problem

When a problem arises, it can be very easy to jump right into creating a solution. However, if you don’t thoroughly examine what led to the problem in the first place, you may create a strategy that doesn’t actually solve it. You may just be treating the symptoms.

For instance, if you realize that your sales from new customers are dropping, your first inclination might be to rush into putting together a marketing plan to increase exposure. But what if decreasing sales are just a symptom of the real problem?

When you define the problem, you want to be sure you’re not missing the forest for the trees. If you have a large issue on your hands, you’ll want to look at it from several different angles:

Competition

Is a competitor’s promotion or pricing affecting your sales? Are there new entrants in your market? How are they marketing their product or business?

Business model

Is your business model sustainable? Is it realistic for how fast you want to grow? Should you explore different pricing or cost strategies?

Market factors

How are world events and the nation’s economy affecting your customers and your sales?

Are there any issues affecting your team? Do they have the tools and resources they need to succeed?

Goal alignment

Is everyone on your team working toward the same goal ? Have you communicated your short-term and long-term business goals clearly and often?

There are a lot of ways to approach the issue when you’re facing a serious business problem. The key is to make sure you’re getting a full snapshot of what’s going on so you don’t waste money and resources on band-aid solutions.

Going back to our example, by looking at every facet of your business, you may discover that you’re spending more on advertising than your competitors already. And instead, there’s a communication gap within your team that’s leading to the mishandling of new customers and therefore lost sales.

If you jumped into fixing the exposure of your brand, you would have been dumping more money into an area you’re already winning. Potentially leading to greater losses as more and more new customers are dropped due to poor internal communication.

This is why it’s so vital that you explore your blind spots and track the problem to its source.

2. Conduct a SWOT analysis

All good businesses solve some sort of problem for customers. What if your particular business problem is actually an opportunity, or even a strength if considered from a different angle? This is when you’d want to conduct a SWOT analysis to determine if that is in fact the case.

SWOT is a great tool for strategic planning and bringing multiple viewpoints to the table when you’re looking at investing resources to solve a problem. This may even be incorporated in your attempts to identify the source of your problem, as it can quickly outline specific strengths and weaknesses of your business. And then by identifying any potential opportunities or threats, you can utilize your findings to kickstart a solution.

3. Identify multiple solutions with design thinking

As you approach solving your problem, you may want to consider using the design thinking approach . It’s often used by organizations looking to solve big, community-based problems. One of its strengths is that it requires involving a wide range of people in the problem-solving process. Which leads to multiple perspectives and solutions arising.

This approach—applying your company’s skills and expertise to a problem in the market—is the basis for design thinking.

It’s not about finding the most complex problems to solve, but about finding common needs within the organization and in the real world and coming up with solutions that fit those needs. When you’re solving business problems, this applies in the sense that you’re looking for solutions that address underlying issues—you’re looking at the big picture.

4. Conduct market research and customer outreach

Market research and customer outreach aren’t the sorts of things small business owners and startups can do once and then cross off the list. When you’re facing a roadblock, think back to the last time you did some solid market research or took a deep dive into understanding the competitive landscape .

Market research and the insights you get from customer outreach aren’t a silver bullet. Many companies struggle with what they should do with conflicting data points. But it’s worth struggling through and gathering information that can help you better understand your target market . Plus, your customers can be one of the best sources of criticism. It’s actually a gift if you can avoid taking the negatives personally .

The worst thing you can do when you’re facing challenges is isolating yourself from your customers and ignore your competition. So survey your customers. Put together a competitive matrix .

5. Seek input from your team and your mentors

Don’t do your SWOT analysis or design thinking work by yourself. The freedom to express concerns, opinions, and ideas will allow people in an organization to speak up. Their feedback is going to help you move faster and more efficiently. If you have a team in place, bring them into the discussion. You hired them to be experts in their area; use their expertise to navigate and dig deeper into underlying causes of problems and potential solutions.

If you’re running your business solo, at least bring in a trusted mentor. SCORE offers a free business mentorship program if you don’t already have one. It can also be helpful to connect with a strategic business advisor , especially if business financials aren’t your strongest suit.

Quoting Stephen Covey, who said that “strength lies in differences, not in similarities,” speaking to the importance of diversity when it comes to problem-solving in business. The more diverse a team is , the more often innovative solutions to the problems faced by the organization appear.

In fact, it has been found that groups that show greater diversity were better at solving problems than groups made up specifically of highly skilled problem solvers. So whoever you bring in to help you problem-solve, resist the urge to surround yourself with people who already agree with you about everything.

6. Apply lean planning for nimble execution

So you do your SWOT analysis and your design thinking exercise. You come up with a set of strong, data-driven ideas. But implementing them requires you to adjust your budget, or your strategic plan, or even your understanding of your target market.

Are you willing to change course? Can you quickly make adjustments? Well in order to grow, you can’t be afraid to be nimble .

By adopting the lean business planning method —the process of revising your business strategy regularly—you’ll be able to shift your strategies more fluidly. You don’t want to change course every week, and you don’t want to fall victim to shiny object thinking. But you can strike a balance that allows you to reduce your business’s risk while keeping your team heading in the right direction.

Along the way, you’ll make strategic decisions that don’t pan out the way you hoped. The best thing you can do is test your ideas and iterate often so you’re not wasting money and resources on things that don’t work. That’s Lean Planning .

7. Model different financial scenarios

When you’re trying to solve a serious business problem, one of the best things you can do is build a few different financial forecasts so you can model different scenarios. You might find that the idea that seemed the strongest will take longer than you thought to reverse a negative financial trend. At the very least you’ll have better insight into the financial impact of moving in a different direction.

The real benefit here is looking at different tactical approaches to the same problem. Maybe instead of increasing sales right now, you’re better off in the long run if you adopt a strategy to reduce churn and retain your best customers. You won’t know unless you model a few different scenarios. You can do this by using spreadsheets, and a tool like LivePlan can make it easier and quicker.

8. Watch your cash flow

While you’re working to solve a challenging business problem, pay particular attention to your cash flow and your cash flow forecast . Understanding when your company is at risk of running out of cash in the bank can help you be proactive. It’s a lot easier to get a line of credit while your financials still look good and healthy, than when you’re one pay period away from ruin.

If you’re dealing with a serious issue, it’s easy to start to get tunnel vision. You’ll benefit from maintaining a little breathing room for your business as you figure out what to do next.

9. Use a decision-making framework

Once you’ve gathered all the information you need, generated a number of ideas, and done some financial modeling, you might still feel uncertain. It’s natural—you’re not a fortune-teller. You’re trying to make the best decision you can with the information you have.

This article offers a really useful approach to making decisions. It starts with putting your options into a matrix like this one:

Use this sort of framework to put everything you’ve learned out on the table. If you’re working with a bigger team, this sort of exercise can also bring the rest of your team to the table so they feel some ownership over the outcome.

10. Identify key metrics to track

How will you know your problem is solved? And not just the symptom—how will you know when you’ve addressed the underlying issues? Before you dive into enacting the solution, make sure you know what success looks like.

Decide on a few key performance indicators . Take a baseline measurement, and set a goal and a timeframe. You’re essentially translating your solution into a plan, complete with milestones and goals. Without these, you’ve simply made a blind decision with no way to track success. You need those goals and milestones to make your plan real .

Problem solving skills to improve

As you and your team work through this process, it’s worth keeping in mind specific problem solving skills you should continue to develop. Bolstering your ability, as well as your team, to solve problems effectively will only make this process more useful and efficient. Here are a few key skills to work on.

Emotional intelligence

It can be very easy to make quick, emotional responses in a time of crisis or when discussing something you’re passionate about. To avoid making assumptions and letting your emotions get the best of you, you need to focus on empathizing with others. This involves understanding your own emotional state, reactions and listening carefully to the responses of your team. The more you’re able to listen carefully, the better you’ll be at asking for and taking advice that actually leads to effective problem solving.

Jumping right into a solution can immediately kill the possibility of solving your problem. Just like when you start a business , you need to do the research into what the problem you’re solving actually is. Luckily, you can embed research into your problem solving by holding active reviews of financial performance and team processes. Simply asking “What? Where? When? How?” can lead to more in-depth explorations of potential issues.

The best thing you can do to grow your research abilities is to encourage and practice curiosity. Look at every problem as an opportunity. Something that may be trouble now, but is worth exploring and finding the right solution. You’ll pick up best practices, useful tools and fine-tune your own research process the more you’re willing to explore.

Brainstorming

Creatively brainstorming with your team is somewhat of an art form. There needs to be a willingness to throw everything at the wall and act as if nothing is a bad idea at the start. This style of collaboration encourages participation without fear of rejection. It also helps outline potential solutions outside of your current scope, that you can refine and turn into realistic action.

Work on breaking down problems and try to give everyone in the room a voice. The more input you allow, the greater potential you have for finding the best solution.

Decisiveness

One thing that can drag out acting upon a potential solution, is being indecisive. If you aren’t willing to state when the final cutoff for deliberation is, you simply won’t take steps quickly enough. This is when having a process for problem solving comes in handy, as it purposefully outlines when you should start taking action.

Work on choosing decision-makers, identify necessary results and be prepared to analyze and adjust if necessary. You don’t have to get it right every time, but taking action at the right time, even if it fails, is almost more vital than never taking a step.

Stemming off failure, you need to learn to be resilient. Again, no one gets it perfect every single time. There are so many factors in play to consider and sometimes even the most well-thought-out solution doesn’t stick. Instead of being down on yourself or your team, look to separate yourself from the problem and continue to think of it as a puzzle worth solving. Every failure is a learning opportunity and it only helps you further refine and eliminate issues in your strategy.

Problem solving is a process

The key to effective problem-solving in business is the ability to adapt. You can waste a lot of resources on staying the wrong course for too long. So make a plan to reduce your risk now. Think about what you’d do if you were faced with a problem large enough to sink your business. Be as proactive as you can.

Editor’s note: This article was originally published in 2016. It was updated in 2021.

Harriet Genever

Posted in management.

Explore Lean Thinking and Practice / Problem-Solving

Problem-Solving

Explore the process that’s foundational to assuring every individual becomes engaged by arming them with methods they can use to overcome obstacles and improve their work process.

Overcoming obstacles to achieve or elevate a standard

In a lean management system, everyone is engaged in ongoing problem-solving that is guided by two characteristics:

Lean thinkers & practitioners understand that the problem-solving process is impeded if you make the common mistake of mechanically reaching for a familiar or favorite problem-solving methodology or, worse, jump quickly to a solution. 

Leaders and teams avoid this trap by recognizing that most business problems fall into four categories, each requiring different thought processes, improvement methods, and management cadences.

The Four Types of Problems

Type 1: Troubleshooting: reactive problem-solving that hinges upon rapidly returning abnormal conditions to known standards. It provides some immediate relief but does not address the root cause.

Type 2: Gap from Standard: structured problem-solving that focuses on defining the problem, setting goals, analyzing the root cause, and establishing countermeasures, checks, standards, and follow-up activities. The aim is to prevent the problem from recurring by eliminating its underlying causes.

Type 3: Target Condition: continuous improvement ( kaizen ) that goes beyond existing standards of performance. It may utilize existing methods in new, creative ways to deliver superior value or performance toward a new target state of improvement.

Type 4: Open-ended: innovative problem-solving based on creativity, synthesis, and recognition of opportunity. It establishes new norms that often entail unexpected products, processes, systems, or value for the customer well beyond current levels. 

By helping everyone in the organization to understand the importance of taking ownership of seeing and solving all types of problems, lean thinking & practice:

Ultimately, building a problem-solving culture creates a competitive advantage that is difficult for competitors to match.

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Be the first to learn of new learning opportunities and the latest practical, actionable information. subscribe to an lei newsletter., join our #leancommunity.

A new online Slack workspace where lean practitioners gather to engage in collaborative problem-solving to help each other cope with today’s challenges.

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How to Solve Cash Flow Problems in Business

Business cash flow is complex. If you have gotten your MBA, you know a business can be profitable but cash flow negative. A business can also be unprofitable and cash flow positive. Cash flow issues in small business are common and not as simple as boosting revenue or cutting costs. Let’s examine how a business identifies and improves cash flow problems.

Identifying cash flow problems

Cash flow issues in business come in many different flavors. Knowing how to solve cash flow problems depends on identifying the root cause. Small business owners often resort to the same tools for every problem: get more sales… get more debt… work harder! If you have not identified the exact cash problem in your business, your efforts may be making the problem worse.

A turnaround consultant will quickly and accurately identify your business cash flow issue. Below are some common small business cash flow issues they may identify:

How a business can improve cash flow

Small businesses commonly have a combination of cash flow issues. For example, a high cost of growth may have forced you to take on excessive debt; or, inaccurate accounting may be allowing fraud to occur. Since time and cash are running short, prioritizing these issues and executing the right solution is critical to an effective turnaround.

You would not expect a doctor to prescribe a medicine without performing a thorough examination and testing. Similarly, you should not expect to solve your cash flow problems without identifying the proper business cash flow issue.

Engaging a turnaround professional will empower you by identifying the issues quickly and building a financial plan to improve cash flow. Our CFOs are available for a free consultation to see if we can help your small business with a turnaround. Book an appointment here .

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What Is Problem Solving in Business?

Problem-solving in business is defined as implementing processes that reduce or remove obstacles that are preventing you or others from accomplishing operational and strategic business goals.

In business, a problem is a situation that creates a gap between the desired and actual outcomes. In addition, a true problem typically does not have an immediately obvious resolution.

Business problem-solving works best when it is approached through a consistent system in which individuals:

Why Problem Solving Is Important in Business

Understanding the importance of problem-solving skills in the workplace will help you develop as a leader. Problem-solving skills will help you resolve critical issues and conflicts that you come across. Problem-solving is a valued skill in the workplace because it allows you to:

How to Solve Business Problems Effectively

There are many different problem-solving skills, but most can be broken into general steps. Here is a four-step method for business problem solving:

1) Identify the Details of the Problem: Gather enough information to accurately define the problem. This can include data on procedures being used, employee actions, relevant workplace rules, and so on. Write down the specific outcome that is needed, but don’t assume what the solution should be.

2) Creatively Brainstorm Solutions: Alone or with a team, state every solution you can think of. You’ll often need to write them down. To get more solutions, brainstorm with the employees who have the greatest knowledge of the issue.

3) Evaluate Solutions and Make a Decision: Compare and contrast alternative solutions based on the feasibility of each one, including the resources needed to implement it and the return on investment of each one. Finally, make a firm decision on one solution that clearly addresses the root cause of the problem.

4) Take Action: Write up a detailed plan for implementing the solution, get the necessary approvals, and put it into action.

What Are Problem-Solving Skills?

Problem-solving skills are specific procedures that can be used to complete one or more of the four general steps of problem-solving (discussed above). Here are five important examples:

Using Emotional Intelligence: You’ll solve problems more calmly when you learn to recognize your own emotional patterns and to empathize with and guide the emotions of others. Avoid knee-jerk responses and making assumptions.

Researching Problems: An effective solution requires an accurate description of the problem. Define simple problems using quick research methods such as asking, “What? Where? When? and How much?.” Difficult problems require more in-depth research, such as data exploration, surveys, and interviews.

Creative Brainstorming: When brainstorming with a group, encourage idea creation by listening attentively to everyone, and recognizing everyone’s unique contributions.

Logical Reasoning: Develop standard logical steps for analyzing possible solutions to problems. Study and apply ideas about logical fallacies, deductive reasoning, and other areas of analytical thought.

Decisiveness: Use an agreed-upon system for choosing a solution, which can include assigning pros and cons to solutions, identifying mandatory results, getting feedback about solutions, choosing the decision-maker(s), and finishing or repeating the process.

How to Improve Problem-Solving Skills

Learning how to solve business problems takes time and effort. Though some people appear to have been born with superior problem-solving skills, great problem solvers usually have practiced and refined their abilities. You can develop high-level skills for solving problems too, through the following methods:

Ask and Listen: Don’t expect to solve every problem alone. Ask for advice, and listen to it carefully.

Practice Curiosity: Any time you’re involved in solving a problem, practice researching and defining the problem just a little longer than you would naturally.

Break Down Problems: Whenever possible, break large problems into their smallest units. Then, search for solutions to one unit at a time.

Don’t Label Yourself Negatively: Don’t allow a problem to mean something negative about you personally. Separate yourself from it. Look at it objectively and be part of the solution.

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7 Steps to Effective Business Problem Solving

Lidia Hovhan SEO Analyst

In the world of business, one piece of advice you can probably abide by is to expect the unexpected.

7 Steps to Effective Business Problem Solving

Whatever the size of your business, you need to have a contingency plan for when problems arise since they are a part of every organization.

Regardless of how well you forecast, plan and test, challenges will always emerge in business. Having the right problem-solving plan can go a long way in ensuring you continue to function even amid unexpected and difficult circumstances.

What is problem-solving in business?

Problem-solving refers to the process to remove or mitigate obstacles that prevent a business from reaching its strategic goals. These can be issues that widen the gap between results and desired outcomes that do not have an obvious or immediate solution. They can be present in operational processes, teams or throughout an organization.

For instance, if the main problem a business is facing is productivity from remote employees, ensuring you equip them with the right work from home essentials by Omnicore can positively impact their productivity.

To be able to approach problem solving effectively, an organization should establish processes that can help in evaluating them, exploring the solutions, prioritizing execution and measuring success.

Why is it so important?

Acquiring problem-solving skills makes it easier for a team to tackle critical business issues or conflicts as they arise. This is a process that needs to be initiated by the management. A CEO or business owner should possess level-headed problem-solving skills to be mirrored by the employees.

With effective problem-solving techniques, the company and staff are better placed to deal with issues more effectively and even establish and refine how they deal with challenges in the future. A business can turn obstacles into opportunities with the right skills while keeping a level head.

In many ways, a problem-solving strategy should mirror how a business reviews performance through regular plan reviews. This calls for working through documentation, finding gaps, digging to find root causes and discussing possible options. Without such a process, problem solving cannot be effective or efficient.

Here are 7 steps you can take to create an effective problem-solving strategy.

1. Define the problem clearly

Whenever a problem crops up, it requires evaluating instead of jumping right into creating the solution. Failing to define and evaluate the root cause of the problem leads to the development of a strategy that will not work, as this is equal to just treating the symptoms.

For instance, when the sales numbers from a new customer start dropping, most businesses will rush into creating a marketing master plan to increase brand exposure as a way of driving up sales. While this may work in the short term, it does not solve the root cause of the drop in sales.

Defining the problem ensures you don’t miss the root cause of the symptoms. To do this, you need to look at it from different angles.

2. Think about multiple possible solutions

The success of any problem-solving process is dependent on how well a business can design a solution. The design thinking approach is one of the most used strategies for problem-solving since it helps to see the issue from different perspectives, leading to creating different possible solutions.

For this to be possible, the business needs to involve a wide array of people in the problem-solving process.

3. Conduct a S.W.O.T analysis

A S.W.O.T analysis is an excellent way or any business to have a look at its strengths and weaknesses. For instance, the launch of a groundbreaking product may be a strength, but the low margins can be the weakness.

In a S.W.O.T analysis, a business will need to document all its external opportunities as well as strengths. This analysis is conducted to make it easier for an organization to become more self-aware. It is a strategic planning tool that helps you identify problems before they affect the business. This makes it easier for the organization to develop solutions before the problem actually arises.

4. Gather input from mentors and the team

When conducting analysis, it’s ideal to seek input from your team to get valued ideas, concerns and opinions on the issues the business is facing. The feedback you get from your mentors, and the team can make your moves more efficient and faster in your problem-solving agenda.

Bringing in your team ensures you use their experiences and expertise in your business to dig deeper and navigate all underlying issues that may have caused the problems you are experiencing. You can also use their ideas and input to craft possible solutions.

If you are a solo entrepreneur, you can benefit from gathering input from your mentors. It’s also advisable to connect with trusted business advisors to get a different view of your issues.

Having greater diversity amongst the people you bring into the problem-solving process can improve your chances of coming up with effective long-term solutions.

5. Prioritize potential solutions

When you allow different people to help you come up with different solutions for your problem, you increase the chances of having multiple possible solutions to a common business problem. With all the options you have, you can evaluate each solution's pros and cons and prioritize the best options in the list.

Always remember that no solution is foolproof. Taking time to go through possible solutions while evaluating their pros and cons increases your chances of implementing the best option of them all.

6. Make a decision

To be able to solve a business problem effectively, you need to decide on the solution to implement. The decision-making process involves settling on the right course of action and should be done as soon as possible to avoid further losses. Taking too long to make a decision only gives the problem more time to impact your business negatively.

Once you have possible, reliable solutions, you need to ensure you implement the solution immediately by choosing a solution and sticking to it.

7. Track progress

The only way to know whether you have successfully solved a problem is by keeping track of the implemented solution. This can be achieved by defining what successful problem-solving looks like and determining how the solution should impact your business.

Some of the questions you can ask when tracking progress include:

The best way to track your progress is by identifying key metrics to track. For instance, you can choose to track your profit margins after implementing a solution. You can tell whether a solution is working by constantly setting and hitting milestones. It’s also important to keep an eye on other business metrics to ensure the solution does not bring rise to other problems. Keeping an eye on the progress will ensure you remain a step ahead of future challenges.

Don’t be afraid of going back to the drawing board to perfect your solution if you identify loopholes that require improvement. Problem solving is a continuous process.

The bottom line

When you are good at problem-solving, you become more valuable in your business, thus setting yourself up for more success. The simple steps highlighted above can make you a more efficient and effective problem solver for your business. Taking time to practice the steps and develop the skills makes the process more natural to you, making future problem solving a breeze.

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Lidia Hovhan

SEO Analyst

https://www.omnicoreagency.com/

Lidia is part of the Content and Marketing team at OmnicoreAgency . She contributes articles about how to integrate digital marketing strategy with traditional marketing to help business owners to meet their online goals. You can find professional insights in her writings.

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Problem Loan

Problem Loan Definition

A problem loan is a scenario where borrowers fail to repay monthly loan installments. The bank labels these loans as nonperforming assets (NPA). It can occur with either a commercial loan or a consumer loan.