One of the biggest concerns for any small- and medium-sized enterprise (SME) is its financial health. Staying on top of cash flow is vital to protecting an SME from unexpected events. Its financial health plays a crucial role in the growth and success of the business.
In the current disappointing economic growth climate, SMEs find themselves at a disadvantage. Large businesses are greatly favored during weak global trade and investment scenarios. Funding gaps continue to be long-standing challenges for SMEs looking to access bank financing.
With today’s global economic situation, SMEs face financing limitation, unfavorable, stringent financing conditions, and higher interest rates. With limited access to financial support, SMEs are at greater risk of going bankrupt.
Managing cash flow and finances are crucial for SMEs. Here are several key suggestions to help your SME protect its financial well-being.
Diversify your financial instruments
The digital transformation holds the potential to level the playing field in the financial management arena. Digital technologies and new banking services have provided SMEs new opportunities to access alternative forms of financing. The advent of fintech and blockchain is increasing access to modern financial services.
Fintech and blockchain are particularly relevant in emerging economies where small businesses have difficulty accessing the traditional financial sector. With an emphasis on accessibility, transparency, and security, Fintech and Blockchain are driving accessible financial solutions to accelerate financial inclusion in underbanked and developing communities.
Equity funding and peer-to-peer lending are two examples of innovative digital financial services entering the financial market. Their presence introduces new opportunities for SMEs to access cheap financial services and diversify their financial instruments.
The introduction of digital tools such as online and mobile banking and alternative credit scoring mechanisms is also impacting how SMEs access traditional financing options.
The availability and access to these digital tools enable SMEs to leverage traditional financing options at considerably lower transaction costs and relatively low default rates.
To better manage finances, SMEs would benefit from protecting their assets from employee theft. Falling victim to fraud can be financially catastrophic for small businesses. Theft of intellectual property, physical assets, and other malfeasance can be a particular problem for SMEs.
Theft can have serious consequences for SMEs. If your SME feels particularly vulnerable to internal and external theft, there are a few simple strategies you could implement to reduce your chances of falling foul:
- Identify and monitor all internal and external stakeholders
- Manage their access to your assets carefully and be vigilant with invoicing the use of a company credit card, and travel or subsistence claims
- Regularly review your financial assets to secure your SME’s financial health
The implementation of appropriate systems and controls can highlight specific vulnerabilities that may need to be improved. Introduction of internal checks and balances and appropriately segregating accounting duties maintains consistent scrutiny and creates a culture of fraud awareness.
Hire a part-time CFO
While most SMEs will view hiring a chief financial officer (CFO) as an expensive overhead, their experience can be an asset in improving cash flow and your business’s profitability. With little justification present for hiring a full-time CFO, an interim or part-time CFO can immediately improve key financial elements of the business.
SMEs that hire a part-time CFO can generate huge improvements to their margins, cash position, and the condition of their balance sheet. A CFO can aid in developing a more comprehensive financial strategy to better manage your cash.
And undoubtedly, an interim CFO can secure low-interest loans, improving your business’s financial health and enabling it to be proactive with its plans for future growth.
Make 12-month forecasts
Financial forecasting can help your business better understand its cash flow. As a vital part of business planning, a 12-month forecast enables your business to make more informed financial decisions and exploit trends that arise, as well as give your small business a competitive edge.
The ability to be financially prepared for the unpredictable builds a buffer if the unexpected occurs. This ensures your cash position remains positive while cutting unnecessary expenditure. Be realistic with your financial forecasts.
Work with a business adviser if you’ve never developed a profit and loss or cash flow forecast before.
Having a lean and agile enterprise enables your business to operate in a more effective and intuitive manner while remaining customer-driven and saving time and money. A lean approach requires examination of your processes and eliminating inefficiencies.
Using a lean management approach can achieve changes in processes that will result in improved efficiency and quality while expanding your business beyond its core service.
The guiding principles of lean management include:
- Pinpointing value from your end customer’s perspective
- Outlining each step involved in a company’s processes while also weeding out those that do not yield great results and value
- Creating a way for the remaining effective to take place in the correct and most efficient sequence
- Repeating the above-mentioned steps until it is observed that waste is no longer being created
Protect your SME’s future
Despite being a driving force across all dimensions of the business environment, SMEs are constantly challenged in maintaining their business’s financial health. SMEs must keep on top of cash flow and appropriate sources of finance to keep on surviving.
The steps above will ensure your SME continues to stay in control of its finances and optimally manage the money going in and out of the business.