Managing finances effectively is crucial for the success and sustainability of any business. Small and medium enterprises (SMEs), in particular, face unique challenges in this arena. Just under 50% of SMEs go bust every year from cash flow issues. Here are five practical tips for SMEs to manage their finances more efficiently, ensuring a healthy cash flow and long-term financial stability.
Prompt Invoicing
A fundamental tip for managing cash flow is to invoice as soon as work commences. Many SMEs in the B2B sector tend to invoice upon completion of work. This practice can significantly delay cash inflow, especially if the project spans over an extended period, coupled with standard 30-day payment terms. For instance, if a project takes 30 days to complete and the payment terms are also 30 days, the business might not see any cash for over 60 days. This extended waiting period can be detrimental to SMEs, where cash flow is the lifeline of the business. To mitigate this, invoicing at the start of the project ensures that the cash inflow process begins early, reducing the wait time for payment and aiding in maintaining a healthier cash flow.
Instalment Payments
Another strategic approach is to request payment of invoices in installments. While this may not always be feasible or accepted by every client or supplier, when agreed upon, it can be extremely beneficial. For example, if faced with a £3,000 invoice, negotiating to pay £1,000 per month over three months can ease the cash flow pressure significantly. This method allows for more manageable payments, ensuring that large expenses do not disrupt the overall financial stability of the business.
Choosing the Right Bank
For new businesses, online-only banks like Starling, Tide, Monzo, and others can be a great starting point. They offer the advantage of quick setup, often getting a bank account operational within a week, as opposed to the lengthy processes of traditional banks. However, it’s important to note that as the business grows, these accounts might face limitations in terms of third-party app integrations and functionality. Therefore, while online banks are a good starting point, SMEs might eventually need to open accounts with traditional banks to accommodate their evolving needs.
Effective Budgeting
Reading and implementing strategies from books like “Profit First” by Mike Michalowicz can offer valuable insights. The book advocates for setting up multiple bank accounts for different financial needs, such as taxes, profits, and operating expenses. This approach helps in segregating funds and provides a clearer picture of actual cash available, preventing the misallocation of funds meant for specific obligations like VAT or taxes.
Payment Providers
Initially, setting up fast payment options like Stripe or GoCardless can be very beneficial, especially when dealing with smaller clients or brands. These services facilitate quicker payment receipt, which is crucial for maintaining cash flow in the early stages of a business. However, as the business grows, particularly beyond the million-revenue mark, it’s important to evaluate the fees charged by these providers. In some cases, transitioning to different payment providers or opting for direct invoicing might be more cost-effective and suitable for the business’s evolving financial landscape.
In conclusion, managing finances in SMEs requires a proactive approach, focusing on strategies that ensure a steady cash flow and financial stability. By implementing these tips, businesses can navigate the financial challenges they face and pave the way for sustainable growth and success.
