SMEs Must Become More Financially Savvy

A recent report from the Office of National Statistics (ONS) has revealed that just one in a hundred Britons is truly financially savvy.

Those taking part in the Wealth and Assets Survey were asked about how well they made ends meet, planned ahead, knew how much they spent from day to day, controlled their spending, stayed informed on economic matters and shopped around when they chose financial products.

The findings are far from inspiring, with participants scoring least well in planning ahead for a "rainy day" and big spending commitments.

Sadly, many of the same financial issues faced by consumers are encountered regularly by Britain's SMEs, with poor money management and a lack of financial planning putting their backs to the wall.

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Often times in business, "unforeseen" expenses can be the result of positive activity such as new client orders and expansion of the organisation.

With a little foresight and education business owners can shield themselves from all but the most dramatic financial challenges, while identifying ways and means of leveraging their assets and debtors to improve their financial position.

Our own survey of our small business clients and our potential clients also points to the same conclusion - lack of planning resulting in financial turmoil.

Most entrepreneurial owners of small but expanding businesses are invariably over-optimistic when it comes to cash flow forecasting.

To them, there will always be “cheques in the post in the morning” to save the day. While it’s good to have such optimism, it is unfortunate that nine times out of ten it is grossly misplaced, and those cheques never arrive.

As invoice discounters to the SME marketplace we see two very simple solutions – however getting the message out is not always so easy. Naturally, the first solution is plan for a rainy day.

Understanding the current status of your cash flow and where it is likely to go in the future involves factoring in the various costs your business is likely to face in the coming year.

If you’re on a growth spurt this could mean new machinery, more staff, or increased inventory to meet an order.

Knowing when these expenses will be due and how the money will come back is imperative for the survival and success of any business.

Equally, it’s no use drafting a forecast and filing it away never to see the light of day again. You should plan things week by week and analyse the forecast regularly. Not only will this help you stay on top of the financials, but it will also show you where and when to expect spikes in expenses so you can better prepare yourself.

The second option is leveraging your assets and debtors to inject working capital into your business.

The benefit of selling your outstanding invoices is that it is money that is already owed to you, so there is no increased exposure to risk for your business.

In an ideal world entrepreneurs would ensure their cash flow was healthy, and that the second option I’ve described was used in a planned manner to support the first option, where the savvy business owner has been approved (at no cost) but doesn’t have to use a penny until such time as the need kicks in.

However, we live in the real world and facilitating clients who need quick access to cash on a “use–it-as-you-need-it-basis” is common place.

In summary, business owners need to get smart about their financials. Optimism is a noble characteristic to have, but it should not blind you to the shortfalls in your cash flow.

Be realistic when planning your company’s financials, and investigate the various options available to your business should it ever require an injection of capital.