Count pounds, not sheep: The issues keeping SME owners up at night

Lack of resources, government support and cashflow problems are some of the issues SMEs face today.

Small businesses are the engine room of the British economy, with contributions across the top ten UK cities forecast to hit £217 billion by 2020.

However, they can also be the most vulnerable – lacking the resources of larger companies means that minor hiccups can turn into major problems. It’s therefore unsurprising that finance-related issues are leading small business owners to suffer from sleep deprivation, putting the growth of this crucial sector at risk.

In a recent survey of more than 250 small business leaders across more than 15 sectors, we identified the five main issues affecting small business leaders and found that more than half (54 per cent) routinely suffer from sleep deprivation as a direct result of finance-related concerns. However, there is more than sleep at stake, as respondents believe that not tackling finance-related concerns can lead to stunted growth within their business.

Keeping this powerful and vibrant sector supported and ensuring it has the conditions needed to thrive is critical for the UK economy. With this in mind, how can these five issues be tackled?

Managing cash flow issues

Topping the list of concerns, having a healthy cash flow dictates everything from the ability to pay staff, to buying stock and investing in further equipment and resource. This is pivotal to the ongoing survival of the business.

Often a hidden problem, many small business owners rely on personal credit cards and overdrafts to plug gaps in cash flow and seasonal lulls. This in turn leads to increased pressure on the business, and can impact on investment decisions – saddling the company with too much debt too early can be a serious problem for young businesses. The pressure to monetise can cap a firm’s value, while in the worst case tough repayment plans can push cash flow over the edge.

Being as tax efficient as possible

Tax can often be an overwhelming area for small business leaders – so it’s unsurprising that this comes in as one of their main concerns. However, there are a few simple steps they can take to better understand their obligations and ensure they’re not paying unnecessary fees.

Many trade bodies and industries have special allowances approved by HMRC (such as the uniform allowance), so it’s worth small companies keeping engaged to check they are claiming everything they are entitled to.

Having a bookkeeper or accountant is also worth considering for this reason, and can help keep company finances organised – leaving entrepreneurs time to focus on the business.

Deciding on the right company structure can be tricky, and can have huge implications for tax obligations, so each situation needs to be carefully assessed. Ensuring that the business has the right structure, whether that’s as a sole trader, partnership, limited liability partnership (LLP) or limited liability company (Ltd), is crucial.

Understanding the profitability of the business

Different to profit (revenue minus expenses), profitability is a small businesses’ bread and butter – it fuels growth, affects the level of bonuses you offer and can make the business a more attractive investment prospect.

Alternatively, a lack of profit can be a daunting prospect – especially where bank loans or other repayment obligations loom. Not having an accurate picture of all income and expenditure makes this a difficult task, and can impact the bottom line.

Boosting profitability relies on growing revenue while decreasing costs. There is no golden goose for this, and tactics will be wholly dependent on the type of business and industry you are in. Examples include increasing staff productivity, increasing prices, developing new products or services and exploring new customers/ clients and markets.

Not having an up-to-date picture of business performance

Without the specialist staff that major corporates rely on, small business leaders can get stuck in the day-to-day operations of their firm, meaning they have less time available to implement new processes or systems to ensure their financial information is accurate.

Ensuring small firms have up-to-date financial information can make a real difference to stabilising cash flow, but companies should also be taking measures such as depositing cash in interest-earning accounts and ensuring they have an efficient payment system to mitigate the risk of late payments.

Financial planning is also critical for fast growth start-ups, as more growth requires more investment – it’s easy to burn cash quickly when taking on more staff, premises and equipment.

Raising finance for growth / expansion

The ever-increasing diversity of the UK’s funding market is great news for small businesses, but funding is still a key worry for small company owners.

Alternative finance providers and banks both need to work harder to make their offering more attractive, while advisors must educate business owners on the full range of funding options so they don’t have to resort to personal debt.

While debt finance like loans and overdrafts tends to be seen as the most obvious funding option, young businesses can get stuck in a cycle of debt. If tough repayment plans compromise cash flow, they can also limit growth.

Equally, equity investment can be overlooked by entrepreneurs who are naturally keen to retain control, yet it offers serious benefits for many high potential small businesses. The boom in peer-to-peer equity platforms has opened up opportunities with investors who are happy to leave the direction of the business in the hands of the entrepreneur.

Whichever route small businesses choose, they should be clear on two things before starting the search for funding; how much and why? A clear plan is vital, whether approaching investors or lenders. Ask for too little money and the need for further investment rounds can damage credibility. Too much and future potential funders can be out-priced.

Bivek Sharma is head of KPMG Small Business Accounting.

Further reading on SME issues

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