SMEs, cash flow forecasting and resilience

cash flow forecasting in stormy weatherThe CEO of a business finance provider, Richard Pepler, of Optimum Finance Ltd was recently reported by the publication Business Matters Magazine to have suggested that entrepreneurs should take a business competency test similar to the driving test before being allowed to set up and run a company.

In fairness this was in the context of his stressing that cash flow forecasting and up to date management accounts were essential documents for a business to produce and monitor regularly.

This makes sense given that a recent survey of SMEs by American Express revealed that 46% of “senior decision makers” had reported that cash flow issues were distracting them from focusing on elements of business growth such as product development and marketing.

As my regular readers will know, I, too, emphasise that regular preparation and scrutiny of management accounts and cash management schedules are fundamental to business survival, resilience and business growth.

Why cash flow forecasting and control are more crucial than ever now

The latest Markit/CIPS service purchasing managers’ index for the services sector showed a reading of 53.5 in July, down from 55.1 in June – the slowest rate in three months.  It has reportedly also slowed down in the Eurozone services sector.

This should sound a warning note given that despite the UK decision in June 2016 to leave the EU, the services sector has remained resilient so far when compared to manufacturing, which has been much more volatile.

This year, at a time traditionally called the “silly season” by the media when politicians are on holiday, there appears to have been no let-up in the flood of Brexit-related noise from both sides of the divide.

In just the last few days we have had Mark Carney, Governor of the Bank of England warning that the chances of a “no deal” Brexit are uncomfortably high and Overseas Trade Minister Liam Fox putting the odds of this happening at 60:40.

The pro Brexit side seeks to play down the fears of lorry parks outside Dover, food and medicine shortages etc as absurd, with Sir Bernard Jenkins this week comparing such warnings to the fears over the Millennium Bug that turned out to have been fruitless and Jacob Rees Mogg asserting that the UK would thrive by trading under World Trade Organisation (WTO) rules while the EU would lose out.

With a global trade war in the background as well, is it any wonder that organisations like the FSB (Federation of Small Businesses) and the IoD (Institute of Directors) are complaining about an “information void” that is making contingency planning near-impossible. An IoD survey of 800 business leaders showed fewer than a third had made any Brexit contingency planning because of the uncertainty.

In my view it is precisely at times of extreme uncertainty that SMEs most need to be building their cash reserves and closely monitoring their Management Accounts.  I recommend that holding a surplus of cash offers a safeguard against any unexpected and unwelcome surprises as well as having the resources for what may be some stunning opportunities.

Now, more than ever, businesses need to build resilience into their finances and protect themselves from potential economic storms if they hope to thrive and eventually grow sustainably.

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