Managing and organising the finances of your business is fundamental to its survival and success. Poor financial management in any business spells failure.
Growing a small business from start-up to established enterprise is challenging and there are lots of things SMEs waste money on along the way. If you are serious about seeing your business flourish in the years to come, you will want to heed the financial habits of the SMEs who have successfully grown and made it ten years or more down the line.
Managing finances isn’t easy and can feel like a chore, especially when you have your eye on important business operations. But, take your eye off of the financial ball and slip into bad financial habits and your operations could come to a screaming halt.
Why not learn from the best? Here are the financial habits adopted by the most successful SME business owners.
Tracking financial information and business planning
Monitoring and evaluating financial performance are the most important tasks successful business owners undertake. Making strategic decisions without the financial facts is a huge risk.
Producing management accounts on a regular basis provides a practical tool for better business planning and decision making. Tracking ratios, such as gross and net profit margin, will help you to understand profitability and spot any downward trends.
All of the financial information available to you will help you to ensure accountability and understand the key drivers of your business performance. Access to quality information on a regular basis will help you to plan ahead and avoid costly mistakes.
According to SME business planning specialist, Oliver Spevak, “So many SMEs get into trouble purely because of a lack of effective business planning. Realistic forecasting is a huge challenge for start-ups and small businesses, but it is an essential driver of business strategy.
“And, when it comes to raising capital, any banking or financing house will expect to see realistic and well consider financial budgets and forecasts.”
Cash efficiency
Cashflow is king to any business, big or small. Cashflow is arguably the most critical element of a business, but ironically it is an area in which most companies could improve. Karen Holden, founder of A City Law Firm, said “Cash-flow problems are closing lots of small companies down.”
Holden said, at a Natwest Business Hub Spotlight Session on cashflow, that she empathises with SMEs not wanting to spoil a commercial relationship by nudging clients for money. That’s where an accounts department or accountant comes in.
“For SMEs, if you have an accounts department then it makes you look more professional, thereby helping to maintain that all-important commercial relationship. And it is amazing how effectively a simple, non-threatening legal letter can speed a payment up.”
Having an emergency fund to cover 3 months operating expenditure is also a prudent idea.
Practicing good credit management from the start can prevent a backlog of overdue payments. Keeping on top of invoices, payments and credit control is vital to keep the money rolling in. Monitoring debtor days is crucial for cashflow.
Staying focused on KPIs and ROI
Key Performance Indicators (KPIs) measure how well a business, specific projects, or individuals are performing in relation to strategic goals and objectives. These are essential for making sure business goals can be measured and achieved. The most successful SMEs use KPIs in some from or another to help them measure success.
Common financial KPIs are debtor days, average margins, inventory turnover, debt ratio and net profit percentage. KPIs can be organised into four main groups:
- Efficiency
- Growth
- Financial health
- Resilience
Think of KPIs as a way to measure the health or pulse of your organisation. Regular and frequent use of KPIs can give valuable insights and help you to make the vital strategic decisions required to keep your business on the right track.
Treating tax like a monthly operating expense
Unexpectedly large tax bills can hit a small business hard and even cause its demise. Tax is a notorious pain for business owners. According to This is Money, nine out of ten small businesses admit they are overwhelmed by tax regulation and one third of firms still write down expenses and keep receipts in a bag.
The rolling out of MTD – Making Tax Digital – by HMRC will make reporting and paying tax much easier. Keeping digital financial records is now a requirement for most businesses and should be seen as a positive – being able to access financial information quickly and easily will help you to make better financial decisions.
Making Tax Digital is currently being rolled out to offer businesses and individuals a quick, simplified, joined-up and online way to file their VAT payments. It will eventually, following further developments, enable businesses to forecast, monitor, calculate and pay tax bills more easily.
Keeping abreast of tax obligations isn’t easy, so seeking advice from your accountant or a tax specialist is always a good idea. Treat tax just as you would any other monthly operating expense to keep your financial statements up-to-date in real time.
Follow these financial habits and your business isn’t guaranteed success, but it will stand a much better chance of staying ahead of the next curveball that is thrown at you.