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Accountancy and Cash Flow Management Tips for SMEs

Read our insights into how small businesses could adapt their approaches to cash flow and carefully manage their finances following coronavirus.
Accountancy and Cash Flow Management Tips for SMEs

Updated on 21/08/2020

Cash flow management could well be the number one concern on the minds of small business owners in the UK right now. With the coronavirus lockdown posing new and immediate challenges to business revenues and continuity, surviving in the short term has been the absolute priority for most.

As lockdown restrictions start to ease and market conditions gradually change, however, is an exclusively short-term mind-set still in the best interests of businesses? Potentially not, especially with longer-term challenges such as loan repayment dates and the possibility of local lockdowns looming on the horizon.

So, what can business owners do to help plan for the future? Take control of their finances. Now seems a more appropriate time than ever for businesses to dive into their finances and take every action possible to protect themselves.

To assist business owners with financial challenges, this article will:

By developing a thorough understanding of the risks and roadblocks that businesses may face, and a working knowledge of how to problem-solve if these scenarios were to come true, businesses may feel more confident, knowing they took reasonable steps towards finding success in these difficult times.

Firstly, then, what are the cash flow challenges affecting businesses today?

Understanding cash flow challenges in 2020

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Three key challenges and risks facing SMEs today are:

1. The end of the furlough scheme

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The furlough scheme has served as a lifeline for businesses, providing £34.7bn of wages to around 9.6m workers in the UK across 1.2m employers. It has reduced the employment costs businesses have had to worry about temporarily, and avoided many job losses, however it’s set to end in October 2020.

The end of the scheme could be a cause for concern for businesses participating in it, who are likely to be asking serious questions around whether they can afford to bring all of their employees back, whether redundancies will have to be made and whether business profitability is likely to suffer under current market conditions.

The government’s reasoning behind ending the scheme is a reluctance to keep people in unproductive jobs, and it is becoming clear that the jobs landscape in the UK has in fact changed in response to coronavirus. Examples of this include the huge boost in e-commerce usage and spikes in delivery services. So, for SMEs, it may be a tough decision to make, but it may be worth looking more closely at whether the temporarily halted jobs in their businesses are still financially viable - or whether they may need to explore new opportunities and can adapt their offerings to meet new demands whilst still remaining profitable.

2. Risk that the revival is short-lived

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When the coronavirus lockdown first hit, there’s a good chance that people stopped using forecasting tools and investing time into cash flow management. After all, what is there to manage when businesses experience downtime, what with reduced incomes and expenditures?

Now that they’re trading under different conditions, however, it may be the perfect time to re-evaluate cash flow management processes. Revenues have likely changed, outgoings have changed, and so now is the time for businesses to consider the state of their accounts and prepare for the next few months.

Making projections for the future which take into consideration the biggest threats or changes that a business is likely to face could be an impactful move for businesses who are concerned about their survivability. For example, has your business accounted for returning staff members’ wages brought about by the furlough scheme ending? Have you considered whether your businesses would remain profitable if a dip in revenues were to be brought about by a sudden local lockdown? How could this affect your trade?

While we’re all hoping for a stable recovery from the coronavirus crisis, factoring contingency elements into your cash flow management is likely a smart move in these uncertain times.

3. Reduced trading and payment deadlines: a dangerous pairing

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Repayments for loans taken out through the government’s loans schemes (namely CBILS and BBLS) are due to begin 12 months after the loan in question was taken out. But whether you’ve taken out a government loan or a private loan, impending repayment dates falling in the early to mid-2021 are a factor that must be taken into account when managing cash flow.

This becomes especially important when considering whether late payments are likely to be an issue for your business. With supply chain complexities increasing, (as suppliers face obstacles around sourcing goods, and consumer demand fluctuates) it could be worth identifying and planning for any potential knock-on effects for your finances that may be brought about by factors beyond your control.

On a practical level, one potential answer to managing reduced trading is building an understanding of exactly how your revenues could dip or rise over the next few months depending on changing market conditions. As we’ve mentioned above, a local lockdown could happen in future. In this instance, do your projections account for this, and could it jeopardise your cash flow? If so, it may be worth exploring how your business could pivot to explore new business opportunities in the event of cash flow difficulties.

Now that we’ve set the scene by outlining some of the current issues you, as a small business owner may run into, let’s take a look at how SMEs typically manage their finances, and how this might need to change.

How do small business owners manage their finances?

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The reality for many small businesses is that their business leaders wear many hats. A CEO, for example, could also serve as the CMO, CFO or COO, taking on multiple responsibilities due to the business being relatively small and not generating large enough revenues to warrant bringing on an experienced but potentially expensive, senior leadership team.

A by-product of doing complex and stressful jobs, by yourself, is that you also may not be as clued up on the cutting-edge or best-practice methods used in your industry. For example, business owners may run their business finances like they would their home finances; if they tap on card, they know it works- but they may not necessarily understand of all the financial pressure points inside their business.

That said, the majority of business owners are likely financially savvy and shrewd leaders, but there could well be a knowledge gap in financial practices between your average business owner and a seasoned financial expert.

Increasing knowledge around best-practices for businesses is something we’re passionate about at Esme, so let’s take a look at some critical insights from our accountancy team into how businesses can improve their cash flow management.

How can small businesses manage their cash flow effectively?

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For businesses who are looking to get their finances in check and be confident in their numbers, here are some tips on cash flow management.

Consider bringing a financial lead on board

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An accountant’s job often is to handle the financial compliance work a business is responsible for. This could include submitting balance sheets, payroll information or filling out tax returns to meet a business’ legal responsibilities.

However, according to our Head of Partnerships, David Beer, “an accountant is not always engaged to provide a ‘health check’ for a business’ finances and make complex projections as to the potential successes and pitfalls a business may run into”.

This type of job requires a much deeper understanding of a business’ activity, financial position and trading history; including its marketing activity, sales performances, revenue position, cost base and an awareness of the economic pressure points. This is precisely where a financial lead could come in handy.

Having a financial lead for your business could make the difference between your business surviving or failing if cash flow is tight. Projections play a huge part in this, so it’s worth asking yourself whether your finance lead has taken steps to make projections for the upcoming months for a variety of different feasible scenarios for your business.

If you’re confident that your business will be able to afford its costs even if an unexpected challenge (such as a local lockdown) were to emerge, then fantastic. If not, it could be worth seeking professional advice either by welcoming a CFO to your team or by outsourcing your financial management to a trusted third-party expert.

Invest in the right technology

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Technology can empower business functions in a variety of different ways, from improving operational efficiencies to enabling internal communications. This is also true within finance, and your financial leader could well advocate the use of some sophisticated cash flow management technology such as Fluidly, or Finstent – part of the Natwest Accelerator. There are a wide range of tools out there beyond these examples, though, all of which are designed to help you with analysing your finances and creating detailed forecasts.

Why is this? What’s wrong with Excel? You may ask. Well, the real power in sophisticated cash flow management programs is that they could unlock a level of insight into your finances that may otherwise be difficult to spot. Crunching large volumes of complex data, this type of software can often help to give a more holistic view of the individual problems you may identify in your own cash flow analysis; enabling you to form a priority list of jobs to tackle quickly- without having to spend hours manually working through large data sets.

To contextualise the somewhat untapped potential of these solutions, Entrepreneur reported in 2015 that around 82% of businesses go out of business because of poor cash flow management, while UKTN (2019) report that small business owners in the UK ‘lose £26,000 on average by being forced to turn down work, specifically due to issues created by insufficient cash flow’.

If efficiencies can be made in cash flow management, whether people, process or tech-oriented, and those efficiencies could prove to be the difference between a business surviving or collapsing, then it could indeed be worth upgrading your cash flow management systems and accountancy processes.

Future-proofing your business against uncertainty

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We are living in uncertain times where the parameters of business are constantly shifting. Some of the challenges that lie ahead are known, (such as loan repayment dates) while others are not, i.e. sudden local lockdowns - and many are beyond our control.

That’s why cash reserves may be the key to helping you fund the road ahead, according to David Beer. ONS figures suggest that 16% of businesses have reported that their operating costs are exceeding their turnover - which leaves them in a position whereby they may not be able to afford to build a cash flow buffer in the immediate future.

The worst-case scenario could involve running out of cash and not truly understanding why, so to avoid this it may be worth investing some time by looking into the types of solutions we’ve mentioned today. Opening discussions around finance within your business and personal support network, communicating frequently with your accountant and reassessing the level of financial guidance your business needs, and seeking expert opinions where appropriate to help you set expectations in a realistic and manageable way are all actionable ways in which you can take steps toward protecting your business’ future today.

How could Esme help?

These are difficult times for many businesses, so it’s important now more than ever, to take good care of yourself and your team. If you’re concerned about your business being impacted financially due to coronavirus, visit our website for information about how we may be able to support you.