Regardless of the size, running a business is a challenge that can be both rewarding and taxing. Being able to overcome the obstacles associated with your business is the deciding factor between success or failure.
SMEs are often led by those who are relatively new to managing their own enterprise in a specific industry or sector, and so lessons are naturally learnt along the way. Even the most experienced owners will be on a continual learning curve. One of the most significant areas where this applies is in the financials of your company.
If you do not come from an accounting background, understanding your business finances can be hard. However, doing so is key to knowing what position your company is in, having forewarning of any potential issues and identifying the right time for growth.
While your understanding of your finances will grow the longer you run your business, there is advice you can learn now to future-proof your business. We have put together our top tips to assist in the management of your SME.
- Have credit management processes in place
- Familiarise yourself with your accounts
- Pay yourself a wage
- Get insurance
- Set aside savings
- Know what financial options are out there for you
- Utilise financial forecasts
- Review your costs regularly
- Invest time in future planning
Have credit management processes in place
Cash flow is influential in keeping your business in a robust financial position, and the key to maintaining good cash flow is having credit management practices in place.
Credit management is involved with making sure your company receives monies owed from customers to prevent gaps in cash flow. Credit management processes could include making sure customers receive explicit instruction of payment deadlines; sending regular reminders when payment is due; having a contingency plan in place for when payments are missed, or even having a benchmark for freezing accounts in the case of regular missed payments.
Plan what your process will be and document it as a continuous reference point. You should also share these processes with your staff so that everyone is on board.
Even if you have yet to face the issue of unpaid invoices, it is still wise to have these processes in place so that you and your staff are aware of the steps to take. The majority of SMEs will suffer from owed credit at some point during their lifespan, so credit management processes can enable you to overcome the associated obstacles smoothly and get payment in better time.
Familiarise yourself with your accounts
The easiest way to make yourself wise to your business finances is to spend time with your accounts. If you have an accountant who handles these on your behalf, you may not have seen your accounts before – but regular checks of these can indicate the health of your SME.
Your accounts will show you what assets your business has, as well as what liabilities you owe elsewhere, which can help you to understand your financial situation better. We have created a guide as to what to look for in your accounts and what they can tell you about your business.
By frequently checking your accounts, you can also identify any common trends, such as increasing sales or profit. This will allow you to plan for the future of your business, such as investing in growth, as well as spot potential hazards and take preventative action. For a small business, this could be the balance between meeting your financial goals or finding yourself in an unfavourable position.
Pay yourself a wage
While your company accounts can tell you a lot about your incomes and outgoings, there is one thing it will not include: your wage. Unless you pay yourself on a salary basis, your earnings will not be included in the way that staff payments are.
As a business owner, it is easy to neglect yourself in favour of your business finances. However, you will be relying on your wage for daily living just as much as your employees, so it is essential to make sure you are paying yourself a salary each month.
Have a set amount you will pay yourself each month. If you need help deciding what this will be, take a look at what you can afford from your accounts and also benchmark against roles with similar responsibilities. Once you have set your wage, make a note to pay yourself this each month and account for it in your regular outgoings to ensure your cash projections are correct.
By compensating yourself, you can make sure your personal finances are in order just as much as your SME’s are.
Get insurance
Another cost that SMEs may forget to include in their overall planning is insurance. Insurance can offer the necessary protection for your business and prevent you from being at a loss if the worst should happen.
There are many types of insurance that small businesses can use. These include buildings and contents cover for your workplace, business interruption insurance, public liability insurance and trade credit insurance. You will also need to have employee liability insurance to compensate staff who become ill or injured through work.
Spend time considering the different insurance types and decide which are appropriate for your business. The easiest way to do this is to determine what risks may be posed to your enterprise that may harm you financially, and what cover could mitigate against this.
Once you have done so, spend time considering different providers to find the right cover for you, and remember to factor in insurance costs to your financial projections. If you are struggling to determine what insurance you need, it is worth contacting an independent advisor or insurance broker for support.
Set aside savings
Being able to achieve good cash flow, where the money going out of your business does not exceed that coming in, is beneficial for any business. However, alongside this, you should be setting aside money as savings when profit allows.
Having a pot of savings to dip into can be a lifeline for your enterprise. Savings can be used as a rainy-day fund in the face of financial challenges, or they can be used to invest in the next stage of growth. Moreover, they can create a safety net for your business and peace of mind for you.
Depending on your monthly profit, endeavour to set aside a proportion of these funds as savings. You may wish to keep these in a separate account to the rest of your finances in order to prevent them from being used accidentally. Over time, you will see your savings grow.
If you ever take your savings out, remember to restart them again as soon as possible so you can enjoy the continued security they offer.
Know what financial options are out there for you
Small businesses, as with any type of business, will undergo times of financial challenge that they cannot overcome alone. There is a broad market of support for SMEs to utilise, and finding the right funding can make a massive difference to your finances and ability to meet your goals.
Any owner should take time to understand the financial options available to their enterprise so that, when the time comes that they need it, they know what the right solution is and where to find it. This could be understanding when a commercial loan can be useful or when to take advantage of short-term solutions like trade finance.
Of course, if you do not come from a financial background, it can be hard to know the ins-and-outs of the many forms of funding available to businesses. Spend time researching online or consider establishing a relationship with an independent advisor who you can refer to for help when your company needs it.
Utilise financial forecasts
Financial forecasts are informed predictions of what your business accounts will look like in the future. Forecasts can range in the length of time they cover, though they usually tend to look between six months and a year ahead. With this future insight, they allow you to plan ahead and make decisions for your SME accordingly.
Financial forecasts can be created by reviewing your current and historical accounts to establish any emerging patterns. They should take into account your regular costs and profits, as well as any way they may change over the coming months. You should also consider any future events that may impact your financial situation, such as the launch of a new product or a change in operations. You may wish to utilise an accountant or external service to help you create forecasts if you are new to the process.
Once your financial forecast is created, take stock of what it is telling you and outline any steps your business needs to take – whether that be preventative action if the forecast doesn’t look as expected, or measures to facilitate predicted growth. Forecasts should be embedded into your business planning to make sure your SME is on the right course.
Forecasts are only predictions, and there is always the chance that something could change. Due to this, it is essential to review your projections and subsequent plans regularly to keep them accurate.
Review your costs regularly
Cutting expenses is associated with businesses in financial trouble; however, it is to the benefit of any company to regularly review their costs and trim away the fat where relevant.
While every business will have costs that are required for them to operate, over time, you may incur new charges which could fall under the category of ‘nice to haves’. Without regular checks, these costs can go by unquestioned. However, the lower your outgoing expenses, the more profit your company can enjoy. In times of hardship, reducing these costs can ease the burden.
Schedule in reviews of your costs as part of your regular company account checks. Make sure, firstly, that you are aware of what every cost is regarding and, secondly, that those costs are still necessary for your operations. If a fee isn’t required (even if it once was), it might be time to eliminate it from your business by cancelling the associated service.
In some cases, reducing costs might not mean cutting services or supplies. Instead, it may mean researching to find out if your provider is the best on offer. This could apply to your energy provider, stock suppliers and any other external services you use. Make a note of how much they charge and check the market to make sure there isn’t a cheaper alternative providing the same quality.
Cost reviews should be done frequently so that, as you and your providers change, you can make sure the payments and agreements in place are still working for the business – and remove them when they are not.
Invest time in future planning
Our last tip for any small business is to plan for the future. While many companies may find the here and now a priority, looking forward can help you to determine where you want your business to be and how your finances can allow you to achieve that.
Future planning can be an enormous task, so the right time should be devoted to it. Utilise input from your company stakeholders and staff members to determine what the next steps are for your business. As part of your planning, you may create short-term and long-term goals, which should all culminate in an overarching goal for your company. This goal might be to grow to a certain level (such as additional branches, a larger enterprise, increased turnover) or to dominate a particular sector.
Once you have your goals in place, look at your financial forecasts and industry data to determine when your finances will allow you to reach those goals. As part of this, consider whether you will need funding to help you get there, what funding you will use and when.
The findings from your future planning sessions should be documented, so you have a constant referral tool to guide your SME. Regular reviews will allow you to track your progress and flag up any potential obstacles. With the goals in place, you can make sure your company stays on an upwards trajectory and that your finances accommodate this.
The tips outlined in this blog should give you some guidance as to what you can do now to ensure the financial success of your SME.
However, if you need help, our team of expert advisors can help. With experience across a range of finance types, we can help you to find the right funding solution for your unique business challenges.
Please call the team today for a free consultation on 0203 327 0567 or email [email protected].