SURVIVING THE STORM AHEAD- Help For SMEs
By DEK Financial Management Trading as part of The eFM Network (eFinancial Management) | Wednesday, November 02, 2011, 15:04
Dennis Kilbey FCA
Dennis Kilbey, Finance Director at e-FM Network, reveals the challenges that SMEs in the country will face in the approaching months and discusses several survival strategies management teams need to adopt. SMEs need to be well-equipped to combat the imminent challenges of the future, overcome them and aim to outperform the market as the harsh times draw near.
Small and medium sized businesses could face a desperate battle to stay afloat in the next few months. The recession has had a profound impact on each of the revenue streams that fuel the small business sector, and according to city analysts, the worst is yet to come. The changing landscape of business, pressures on cash flow, budgetary cuts and evolving legislations will force SMEs to critically assess how to fulfil their business objectives in the coming months without compromising their bottom line, and stay afloat.
Considerable efforts have been made to unblock the interbank lending market and stimulate the underlying so-called 'real' economy, but even more strategies and support will be required to weather the impact of this economic slow down. While the government continues to seek an effective stimulus program that will ameliorate the adverse economic situation, small businesses continue to suffer as they are more vulnerable to changes in economic activity and are battling with massive cashflow problems in many cases. A large number of SMEs have managed to make it through the recession with hardly any reserves, and may very well soon discover that they are unable to access the working capital that they need to survive.
A continuing challenge is to adapt to our new economic climate by developing and adapting practices that make them the best SME business that they can be and part of the challenge will be to ensure that each business harnesses the unifying potential of their various operations and depth of skills, while keeping a tight grip on cash. This is the key to survival- efficient cashflow management.
Rather than be at the whim of external financiers or credit committees or even face the threat of extinction, management teams can apply the following strategies in the following months to strengthen their operational, management and financial competencies.
In the months ahead, you need to adopt these 5 major strategies:
1. Monitor- Produce and actively use up-to-date and accurate management figures to enhance your finance management process. Use your Profit & Loss statement to identify the difference between 'profit and cash surplus' or 'loss and cash deficit' as this will be invaluable information to have in the coming months. Management accounts can be a useful business planning tool to analyse your business data and help you make informed business decisions. Their usefulness should never be underestimated. If you do not use these, find out who can produce them for you as they can help improve the performance of the company. You should also establish key performance indicators for an early indication of problems such as debtor age and debtors over limit.
2. Control- Get surplus funds to work for you. Reconcile bank accounts to accounting records. Smooth outflows where possible rather than having 'lumpy' payment profiles. Understand your costs. Recognise which of your services and products are making you money. This will enable you to focus on the most profitable aspect of your offering and could significantly diminish your losses or enhance your profits. If you require funding, consider alternative sources of funding, security requirements and well prepared business plans.
3. Forecast- A key indicator which all companies with adverse cashflow should be watching is 'burn rate'. Predict the peaks and troughs of your business in advance and take active steps to reduce the impact of any negative cash flow periods. An accurate forecast can give you an indication of your borrowing requirements or excess cash available for investment, development or settling other liabilities. Carry out periodic performance reviews to improve working capital management.
4. Continuous Improvement- Initiate methodical and structured credit control process when necessary. Give slow-paying/ no-pay customers a wide berth. Consider incentives for early payment. Invoice promptly and properly. Negotiate longer credit periods with suppliers. Avoid accepting early deliveries and minimize level of buffer stocks. Adopt a credit control ethos and appoint a 'champion' who can take responsibility for this process. Review and reassess credit terms.
5. Always remember the mantra- Turnover is Vanity, Profit is Sanity and Cashflow is Reality. Be strategic and avoid deviating from your long terms goals in spite of routine responsibilities. Your focus will enable you to overcome day-to-day challenges and keep an eye on your bottom line. Remember a sale is not a sale until it is in the bank!
Management teams can easily miss obvious solutions as they are usually too close to a problem. At times, you many need an independent view from someone who can look at things objectively and holistically. The vital issue for many will be to react quickly and seek help as soon as they spot problems which they are unable to resolve on their own. Timely advice could very well save many SMEs in the near future.
For an informal discussion to see where we can together take on the challenges of the coming months and build your business into the thriving operation you aspire to have, contact our team at e-FM.