You may be thinking you are too small to make sense of your numbers on budgets and forecast and financial management is not for you. Maybe when you grow bigger. But not yet. Aside from the fact that financial management is a pillar of growth, there are other reasons why a small business needs to know their numbers better than a big business.
After all, a small business is not a little big business. So, what are the main differences, and how can you get better predictability of your business?
1# More at stake in a small business
Most SMEs are managed by their owner(s). They rely on their business to provide for themselves and their families. If the business does not provide, there is no other source of income. Big businesses tend to have multiple owners who could draw income from other businesses simultaneously and do not rely on dividends to live. Accounting does not help here because dividends are a post-factum rather than part of the calculations.
Moreover, external circumstances, such as changes in government regulations, tax or interest rates increases, tend to affect the SME’s purse more than they do for large corporations.
2# Little room for manoeuvre
Big businesses tend to have multiple sources of revenue, with products or services diversified enough so that if something does not work, something else will. They also have access to funding in case nothing works for a while.
Most small businesses are niched and serve a specific market. They often suffer from resource poverty (including time, financial and expertise constraints), which requires very different management approaches. If that market stumbles, there is very little wriggle room, especially cash wise. Banks do lend to small businesses, but the burden will be felt for years to come. Switching markets takes time – up to three years if done well.
Such limitations mean that smaller businesses rarely survive management failures. So, what can SMEs do to overcome these?
3# Liquidity, liquidity, liquidity
Having a forecast is crucial for small business success, and having a realistic forecast is even more so. And it’s worth remembering that a financial forecast is not the same as setting sale targets.
Many small businesses rely on a wishful thinking approach to forecast – “I want to reach 1 million” – and cannot see the intermediary steps leading to the million. So they rarely get there. But when they start putting pen to paper (or numbers in a spreadsheet), the path to the first million becomes feasible. And so does their personal income stability.
4# Review and adjust regularly
Small businesses are more often affected by seasonal variations in sales. Realistic cashflow forecasts and updates are essential to allow SMEs to ride the waves of market changes.
Cash flow requires a template, knowledge of financial management and discipline. And often, small businesses don’t even have the first part. They have various attempts at putting numbers together on a spreadsheet, then dropping the task as it is too cumbersome, coming back to it in a moment of desperation until no one can ‘read the runes’ anymore. Most effort is put into reconstructing the past cash, and it rarely reaches the point of the cashflow forecast. And being able to see your future cash is a matter of survival.
5# When profit is not a given
Small companies can go a surprisingly long time without making a significant profit. Their demise starts on the day they cannot meet a critical payment. Hence, for small businesses, the importance of the cashflow is much higher than the ROI or hitting a hefty profit.
So, when things don’t go as planned, it’s time to look at increasing profit margins to improve your business predictability. It can be achieved by reviewing costs, constraining expenses, improving productivity or increasing prices.
The good part
Most small business owners are eternal optimists. They have to be. Otherwise, they would not have started a business. However, they have to learn how to weather fluctuations in growth, endure a considerable degree of instability and simply stick to fundamentals to survive and thrive.
Should you have any questions about this article or would like a second opinion on your cashflow projections, please feel free to contact us. We’d be happy to help.
Find out more
If you would like to find out more about financial management 101, check out one of our regular webinars for businesses in professional services. And if your business is an HR services agency – join us for a free practical session on 16 February at 10:00 AM >> https://criticalfinancialskillsforhr.eventbrite.com.
You will come away with answer to the following questions:
- How to analyse cost in HR?
- What is the rule of 3?
- And how do benchmarks impact the predictability of your business?