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Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting Finance General Turnaround

Do SMEs gather enough data to make informed decisions?

While large companies tend to have systems that provide information for management to monitor activity and make informed decisions, small businesses tend to ignore these in the mistaken assumption that because the directors are involved in everything they know what is going on.
Many SMEs simply focus on profit and loss, where the directors monitor how profitable the business is. They will also certainly keep an eye on the bank account. This may reassure them about their cash position.
However, without a balance sheet and regular scrutiny of the current assets: book debts and work in progress, stock and short term liabilities: factoring, trade creditors and VAT/PAYE it is difficult to know the real situation.
It is common for small businesses to run out of cash because they simply haven’t been paying suppliers or HMRC.
The reassurance of cash in the bank is little comfort when liabilities are mounting.
We would argue that it’s essential to have a basic dashboard of key figures to review regularly, including some of those items listed above. This will give a more accurate picture of where the business is today, but even so does not necessarily tell you where it is going.
Monitoring performance also requires further information, such as debt collection, aged debtors or pre-payment by customers as well as sales related information such as inquiries, quotes and sales orders are equally essential for planning the future.
While every business is different, each should have a dashboard of information that will help it monitor performance and adjust plans to ensure it doesn’t run out of cash.
What information is crucial to your business future?

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Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting Finance General Turnaround

Why do SMEs need to understand their balance sheet?

For years we’ve seen many SMEs who do not produce regular management accounts, which we would argue are far more important to the small company than year-end accounts.
Too many SMEs rely on the profit and loss and do not put enough time into understanding their balance sheets.
Yet it is the balance sheet that tells a business what is really in the ‘tank’ which is more than simply the cash in the bank. Current assets and in particular those like recent debtors, work in progress and easy to sell stock that can all be quickly turned into cash are key. The other item to monitor is current liabilities such as trade creditors and HMRC liabilities. Withholding payment can provide temporary respite and even improve the cash balance in the bank but creditors don’t go away.
A related issue is that a lot of SMEs are reliant on factoring or invoice discounting their book debts which essentially means that there is little cash to come back to them when the book debts are paid. All too often such companies have large liabilities without current assets to service them so they become reliant on new sales or prepayments which are in fact another liability.
If, for example, a business has book debts of £10,000 which are factored at 70% and a liability to trade creditors of £5,000, it has a problem because it really only has £3,000 to pay the trade creditors since the factoring company will keep £7,000 of book debts when they are paid.
It is crucial for all SMEs and in particular those planning to grow to understand their balance sheet and ensure that they have sufficient cash to fund growth without over trading, ie running out of cash.
I shall address monitoring the balance sheet and possible key indicators in a future blog.