Small and medium enterprises (SMEs) are the lifeblood of the global economy. At last count, they made up over 95% of the businesses in OECD nations, whose members account for the majority of global trade. At the same time, however, running an SME isn’t easy. Statistics indicate that almost 50% of SMEs in the United States will fail before completing their fifth year in operation, and the outlook is much the same elsewhere in the world. There are a variety of reasons for the high failure rate among SMEs, but most of them boil down to one, single factor: money.
SMEs run into all kinds of difficulties when learning how to properly manage their finances, ranging from poor accounting practices to over-leveraging to fuel growth. It’s such a hard but crucial business function to master, that even companies with booming sales and revenue could find themselves out of cash and forced to close their doors. To help budding entrepreneurs and SME managers increase their odds of success in this all-important task, here’s a list of the top four money management tips for SMEs to maintain their financial health.
1. Create a Realistic Cash Flow Budget
One of the most critical yet poorly-understood parts of managing an SME’s finances is its cash flow budget. A cash flow budget is much more than a simple accounting of a business’s inflows and outflows of capital; it’s more like an income and expense forecast based on educated guesses, known future expenses, and averages drawn from past performance data. Getting this essential operations planning tool wrong is the reason an SME could find itself in the unenviable position of making a fortune but running out of cash anyway.
When creating a cash flow budget, it’s crucial to build in as many known elements as possible (such as current accounts receivable and fixed capital expenditures) and to build in enough padding to account for any unknowns that can’t be assigned a specific cost line item. Then, take great care to compare cash flow budget forecasts with actual results each month, to both test and refine the assumptions and figures that form the basis of the next set of projections. Over time, this will lead to a reliable budget that will help the SME manage its cash flow and remain solidly in the black.
2. Stay on Top of Accounts Payable
For an SME, generating sales and revenue is only half of the battle. To stay viable, it’s also crucial to manage capital outflows and make sure all of the business’s outstanding debts are paid in a timely manner. That’s because an average SME (especially in their early stages) tends to operate on a thin profit margin, owing to the need for working capital and funds to expand the business. Failing to pay bills and tax debts on time can add a cascade of late fees and penalties to the financial mix, upsetting the already delicate balance between profit and loss. If the SME’s finances are especially complex, it can be helpful to create an aging schedule, which will illustrate how well (or how poorly) the business is managing its bills.
3. Minimize Expenses
Although it should go without saying, cutting down on expenses is a necessary and useful part of managing SMEs finances. Despite how obvious this may seem, a surprising number of entrepreneurs and SME managers only tackle this critical task in a decidedly superficial way. For example, an SME financial manager may look to save a few thousand dollars when purchasing a company vehicle, but neglect to look for ways to save on ongoing fuel costs. SMEs tend to waste an obscene amount of money by ignoring small recurring expenses, or by failing to capitalize on things like rebates on large fixed asset purchases. Recapturing just a fraction of that money can do wonders for an SME’s bottom line, and all it takes is a little attention to detail and an eye for frugality.
4. Manage Credit, on Both Sides of the Ledger
For an SME, access to credit can be the difference between having the financial flexibility to grow as needed and becoming mired in an endless loop of earning money only for it to go right back out the door to finance necessary business purchases. The problem, however, is that SMEs can also get in over their heads by using easy credit terms to over expand without a sound business reason to do so. As a result, cash outflows will mount with no way to stop the bleeding, leading to disastrous consequences. To avoid that fate, it’s critical for SME managers to consider credit terms carefully, and to build accurate revenue projections to justify borrowing to finance expansion. If the math in those projections doesn’t work, accruing the debt will end up being a self-inflicted wound.
At the same time, it’s also important for SMEs to be careful about the ways they extend credit to their own customers. This is more often an issue in the business-to-business sector, where vendors make purchases via invoicing and company accounts, but it can also be an issue for SMEs in certain consumer goods sectors as well. Extending generous credit terms to certain customers may encourage more sales, but it also makes the business vulnerable when those customers have financial problems of their own. For that reason, it’s a good idea for SMEs to extend credit to customers only when necessary and even then only when they can guarantee sufficient cash flows to protect themselves in the event of non-payment.
Building a Solid Financial Future
Operating an SME comes with plenty of challenges, not least of which is building a customer base and providing a product or service with a strong value proposition. The last thing an SME needs is to waste a chance to be viable and profitable due to poor money management. The tips provided here are by no means exhaustive, as every business will present its managers with unique financial challenges, but they’re an excellent way to create a solid foundation to build on. At the very least, following them will help the business to avoid tripping over itself on the way to success, and give almost any SME a good shot at beating the odds and enjoying a long, financially sound life filled with growth and opportunity.