Managing Your Cash Flow

SME owners should pass a "test" before they can set up a new company

7 min read

13 August 2018

More than half of new UK businesses don’t survive beyond their first five years and while SME owners will readily blame the tax system, lack of bank lending or late payments, often the failure is down to something much more basic – bad financial management.

The harsh truth is that many SMEs in Britain are very poorly run, and this often results in the failure of great business concepts due to cash flow problems.

In defence of many business founders, knowing how to run a business is not easy – most of us never learn about it at school, college or university. It is something you can only really learn by experience or by seeking out the advice of others with experience. 

It is also true that SMEs have to battle with late payments or unreasonably long payment terms imposed upon them by larger businesses. 

So, while many business owners have an inspired idea or concept, they are not prepared for the admin and financial management that is needed to make a success of it. 

During almost four decades working in commercial finance, lending to small businesses for a wide variety of reasons – from supporting their steady cash flow to assisting with capital expenditure projects – I’ve watched with frustration as dozens and dozens of companies fold due to bad decisions on the part of their leaders. 

That often means the loss of jobs, suppliers, contractors and customers left out of pocket and damage to the wider economy. 

Yet it could so often have been preventable with some better management and planning. 

Most businesses go bust due to a lack of cash, not profitability or sales.

At Optimum Finance, we offer a range of lending solutions that enable SMEs to quickly unlock cash from their unpaid invoices – then, if wanted, we can chase the payments on their behalf.

We feel it is vital to get to know our clients to properly assess their financial needs before we start working with them. We use the first meeting with any new SME as a business “health check” to access how effectively it is being managed.

It is shocking how many small companies are run without the basic financial tools in place: 

Cash flow forecast – this is probably the most important document for a business owner and yet many do not even have one and have no idea what their cash flow projection is. How can a business owner make sensible decisions about spending and costs when they don’t know how much cash they will have in the bank at the end of the month and beyond?

General forecast – business owners need carefully thought through projections in order to plan key commercial decisions such as recruitment and resourcing needs, new premises, stock orders, and much more. It is simply not possible to make an informed decision on any of these things without accurate and regularly updated forecasts.

Management accounts – with numerous user-friendly online accounting systems designed for SMEs and their accountants, it has never been easier for SMEs to keep up to date management accounts.

Much financial reporting can now be automated enabling companies to keep track of their performance against their forecasts, targets and budgets at the click of a button. It also allows business owners to compare their performance with previous months and years to give context and take account of seasonal fluctuations or changing economic conditions. All this is vital if businesses are to identify potential issues as early as possible and take the necessary steps to address them before they begin to affect the stability of the company and risk its future.

In a recent survey we conducted of owners and senior managers in 33 SMEs, we found nearly a fifth (19%) of the businesses questioned could not predict what financial position of their company would be in three months’ time. Less than half of the respondents, said they felt their business had strong financial health.

This has lead me to conclude that all aspiring entrepreneurs should take a business competency test, similar to a driving test, before they are allowed to set up and run a company.

I realise it sounds draconian – and none of us like being tested – but it would be of huge benefit to most new business owners. In the course of studying to ensure they passed such a test, they would learn about those all-important planning tools needed to keep a business on an even keel, giving themselves a far greater chance of success.

It is also about new business owners taking their responsibility to their employees and suppliers seriously.

Even with the best management team in the world, SMEs will still fall victim to late payments and long payment terms imposed on them by bigger businesses. When we questioned SMEs regarding their 30-day payment terms only a miniscule six per cent of them said they actually get paid on time, in accordance with these terms. 

To overcome this requires highly efficient business planning and the ability to release cash when needed – which is where we can help. 

We offer our expert business advice to customers and provide market leading finance solutions to support their companies’ growth or ease cashflow, but if they have no clear grip on what their financial needs are, then they will not get the best out of our services.

Business owners who come to us with clear forecasts, targets and business plans in place are able to provide us with the level of detail we need to tailor our lending solutions to perfectly suit their needs.

By Optimum Finance CEO Richard Pepler