Trade, trade, trade. If you're playing on the difficulty level I'm on (as high as I can figure out how to get it, 96%... not sure where the other 4% is supposed to come in) despite being as bad as personal combat as I am (atrocious), tournaments are dicey propositions at best, especially the ones where your equipment each round is something of a grab bag.
If you want to try tournaments, the best ones are in the Holy Swadian Empire -- everybody gets comparable equipment each round, so you'll never be in a situation where you start out on foot with a bow and arrow, and your opponent starts mounted with a sword and shield. Whoops.
The most you can make from a tournament is 4,180 denars (200 for winning the tournament and 3980 for betting 100 denars on yourself every round, which amounts to a 500-denar "entry fee"). And that's nothing to sneeze at, but that's also assuming you win. Buying three or four sumpters and then running trade routes can be very lucrative and is less dependent on your luck in the arena. For example, you can buy furs in some Vaegir villages for 43 denars, and sell them in Mourne for over 400 denars (or travel to a closer destination and sell them for less, particularly if you don't want to risk running afoul of gun-toting bandits). There are plenty of great trade options, and you can always recruit Katrin to your party and use her ridiculous 7 Trade skill to help you find the best deals leaving a particular city (Vaegir furs to Mourne, Mourne-area tools to Ellis and Lerna, cheap beef from any village selling it for 11 denars to the nearest city, which usually pays 70+ denars for that beef, etc.).
As far as the battles and such go, Sea Raiders (and Raiders) are armed with firearms, so while they aren't that accurate, they do sometimes get lucky and one-shot kill something. Gun-toting Bandits (all over the Imperial State) are an obvious worry as well, and some deserters can be very formidable opponents. I've really just stuck to building up slowly and being very careful about picking my battles. Don't forget that you also start out with poorer (in general) equipment, which can make the very early game very tough.
Bottom line is, yeah, money can be tight (and recruits can be very expensive to maintain), and bandit groups can be very challenging both in their own right and because of your own tough situation. I get the impression that all of that is deliberate, and once you really get yourself rolling, it's that much more satisfying.
Hope that helps, and enjoy the game.
Cheers.