Running a small or medium-sized enterprise (SME) comes with challenges, and financial management is one of the most important areas to get right. Good financial practices keep your business afloat and set the stage for sustainable growth and long-term success.
In this blog, we explore practical strategies to help you future-proof your SME by adopting effective financial management principles that will see your business thrive, even in uncertain times.
Understand your financial position
The first step towards securing your business’s future is having a clear, up-to-date understanding of its financial health. This starts with knowing where your income comes from, your regular expenses and your debts or liabilities. Keeping accurate, timely financial records is essential, as this information will help you make informed decisions about your business.
One way to achieve this is by using accounting software. Many SMEs benefit from cloud-based accounting solutions that allow real-time cashflow, expenses and invoices tracking. As of 2023, more than 60% of UK SMEs have adopted digital accounting tools to streamline their financial processes, according to research by Intuit QuickBooks. Staying on top of your finances can help you avoid pitfalls such as late payments or unexpected cash shortfalls.
Build a cash reserve
While managing day-to-day expenses is crucial, it is equally important to build a cash reserve. Having a financial cushion allows your business to weather unexpected challenges, such as sudden dips in sales or unforeseen costs. A good rule of thumb is to aim for three to six months of operating expenses in reserve.
This reserve also allows you to take advantage of growth opportunities. For instance, you might find a chance to expand your product line or invest in new technology. You could miss these opportunities without a cash buffer, limiting your SME’s growth potential.
Focus on budgeting and forecasting
Effective budgeting and forecasting are vital tools for future-proofing your SME through financial management. A well thought out budget helps you allocate resources effectively, controlling costs while allowing for business growth. Forecasting, on the other hand, helps you plan for the future by predicting revenue, expenses, and cashflow based on historical data and market trends.
For many SMEs, unexpected expenses are a common challenge. However, you can anticipate and prepare for potential disruptions with a robust budget and regular financial forecasting. According to a Sage study, businesses with a clear forecasting strategy are 30% more likely to achieve their growth targets than those without one.
Manage your debt effectively
While debt can be a useful tool for growing your business, it is important to manage it wisely. Unchecked debt can quickly spiral out of control, becoming a burden rather than a benefit. One way to avoid this is by regularly reviewing your debts and ensuring you have a clear repayment plan. This includes not only traditional loans but also supplier credit or leasing agreements.
If your business relies on credit to manage cashflow, it may be worth exploring refinancing options to secure better terms. For example, reducing the interest rate on a loan or extending the repayment period can free up cash for other areas of your business. Taking a proactive approach to debt management will help you stay on top of your obligations without jeopardising your financial stability.
Monitor key financial metrics
To future-proof your SME, it is essential to keep track of key financial metrics that reflect the overall health of your business. Some of the most important metrics include the following.
- Gross profit margin: This measures how much profit you make from your core business activities. A healthy margin means your business generates sufficient income to cover expenses and support growth.
- Cashflow: Positive cashflow ensures you have enough money to cover daily operations and any unexpected costs.
- Current ratio: This measures your ability to meet short-term liabilities with your available assets. A ratio above 1.0 generally indicates good financial health.
By regularly reviewing these metrics, you can identify any issues early and take corrective action before they escalate.
Prioritise tax efficiency
Effective financial management includes ensuring your business is operating in the most tax-efficient manner. Many SMEs miss out on tax reliefs and allowances that could reduce their overall tax burden. For instance, research and development (R&D) tax credits are available to businesses that invest in innovation, even if that is not their primary focus. In the 2021/22 tax year, UK SMEs claimed £7.4bn in R&D tax relief, with the average claim amounting to £57,000, according to HMRC data.
Staying informed about relevant tax breaks and engaging with professionals to review your tax strategy can help ensure your business maximises its available reliefs. This approach can free up funds that can be reinvested in growth or used to improve cashflow.
Seek professional advice
While many SMEs handle financial management internally, there comes a time when seeking professional advice can make a significant difference. Accountants and financial advisers can provide valuable insights into tax planning, cashflow management and long-term financial strategy. They can also help you identify risks and opportunities you may not have considered.
At Business Partners, we specialise in providing tailored financial management and advice and support to SMEs, helping you make informed decisions that will benefit your business now and in the future.
Contact us today to secure your financial future.
