Effective Financial Strategies for small and medium-sized enterprises

As a small business or small to medium enterprise (SME) – a solid financial strategy is crucial to your success. It allows you to allocate resources efficiently, practice effective cash flow management, and respond to market changes and challenges. With the right strategy in place – you can even make your business more attractive to investors, which in turn will help you secure financing and achieve your financial goals.

Many of the challenges commonly faced by SMEs can be tackled with an effective financial plan – securing finance, budgeting resources, and operating in a way that gives you financial security can all be better achieved with a plan in place.

Here’s everything you need to know about building effective financial strategies as an SME.

Your financial glossary

Before you can fully understand and design financial strategies for your business, there are a few key terms you need to get to grips with. Understanding what each of these means, and regularly calculating their value for your business, will help you to stay on top of your overarching financial health.

Sales – the exchange of money for goods and/or services.

Gross Profit – For a product, your gross profit is the sales price of your product, minus the sum it takes to produce it. If you offer a service, it’s the sales price of your service minus the cost of the time it takes to deliver it.

Net Profit – Net profit deducts the same costs as above, but also deducts all other costs of running your business. This could be overheads like team wages, rent, bank charges, or software costs.

Return on Assets Employed – Put simply, this is a metric that’s used to measure how efficiently a company uses its assets to generate profit. The technical calculation is your Net Profit divided by Total Assets, x 100. It’s mainly used by financial organisations to measure the financial health of your business.

Return on Capital Employed – Another ratio used to measure the profitability of your company, the calculation for return on capital employed is your earnings before interest and tax (EBIT) divided by your capital employed (your total assets minus any liabilities).

Debt to equity – This ratio shows how much of your company is owned by creditors, compared by how much shareholder equity is held by the company. It helps financial organisations and lenders to measure your business’s capacity for debt.

Return on Investment – This is the value created by an investment, divided by its cost. It can help you assess the value of expenditure on projects, or assets.

EBITDA – Standing for ‘earnings before interest, taxes, depreciation, and amortisation’ your EBITDA is a value that banks and lenders can use to value your business.

Budgeting techniques and forecasting

Any good financial strategy includes regular reviews and assessment of your financial position. In short – if you’re not budgeting and forecasting for the months ahead, you put the success of your business entirely at risk.

In simple terms, your budget is your spending plan, based on what you make and your existing expenses. It allows you to plan growth in a realistic and manageable way.

Your budget should analyse historic data for your business, assessing revenue trends and spending patterns, before you forecast your revenue for the period ahead. When trying to project what your revenue will be, it might help to look at the previous period as a starting point, and then be conservative with your estimations. With revenue projected, analyse your fixed and variable costs. Where variable costs are unknown, try to account for the worst-case scenario, and be sure to update these, as and when costs become clearer. Now, with a clearer picture of where excess funds are available, you can build in your goals and objectives. Do you need to spend money to achieve these? Then build that in throughout the period. This will form the basis of your budget.

For your budget to be as effective as possible, there are a few other things you can do…

• Give yourself a contingency fund – a pot that’s set aside to cover unexpected expenses. It’s a buffer that covers any expensive eventuality, so that your plan and your budget isn’t completely knocked off course.
• Engage your team – they can really help to give you more detailed information, that will allow you to project more accurately.
• Prioritise essential spending – where things need to happen for the good of your business, this should the priority in your budget.
• Pay attention to the wider world – whether it’s your industry, the market, or the economy, trying to pay attention to external factors that could affect your revenue, or spending will make your budget more effective.

Don’t forget to track your revenue and expenditure against your budget and adjust it accordingly. Regular reviews are a great way to keep on top of your finances and will help you to hone your ability to budget. In time, it will become a tool that you use regularly to support sound decision making in your business – a gold standard for long-term success.

Cost management

One of the main determiners of a successful business is ‘profitability’; the degree to which your business makes money. A key action in having a profitable business, is keeping costs low, where possible. Reducing unnecessary expenses is an ongoing task, one that should be carried out carefully so as not to compromise the quality of your product, service, or operation. Here is a collection of actions that together make a sound financial strategy for cost management:

• Conduct regular expense audits
• Regularly negotiate with vendors and suppliers for the best possible price
• Ensure efficient inventory control
• Leverage technology and automation wherever possible
• Adopt remote working policies
• Implement energy-saving measures
• Reduce non-essential travel and scrutinise associated costs
• Try to ensure efficient processes throughout your business

By conducting these activities on a regular basis, you will encourage a cost-conscious culture which in turn, should help you to reduce costs across your business operation.

Accessing capital

For many SMEs, their budget will identify occasions where the desired spend can’t be met by revenue alone and on these occasions, accessing capital is necessary to meet the desired business objectives. There are several options available:

• Personal savings and bootstrapping
• Bank loans and lines of credit
• Business credit cards
• Angel investors
• Venture capital
• Crowdfunding
• Grants
• Invoice financing and factoring
• Peer-to-peer (P2P) lending

Each funding option has different qualities – and what’s suitable will depend entirely on your business and what you need the finance for. That said, you will give yourself the best chance at securing the right one if you (and your business) have an outstanding credit rating. Stay on top of your finances, invoices, bills, keep an eye on your rating and limit the amount of new credit you take on, to give yourself the best chance of a positive rating.

Top ten takeaways

In summary, here are seven key takeaways, to help you create effective financial strategies for your SME.

1. Gain a full understanding of your financial health – Using the key metrics outlined at the beginning of this article, you can keep a close eye on the financial health of your business. Be sure to understand each term and how it relates to your own finances.
2. Create detailed budgets and forecasts – By creating accurate budgets and regularly forecasting, you can make informed business decisions that will help you to achieve long-term success.
3. Complete regular financial reviews – Continue to review and assess your budget and finances and make decisions accordingly. A mixture of proactive actions and reactive decision making will help you to be financially resilient.
4. Implement cost management strategies – Keeping your costs low will maximise profitability and leave you more money to spend on reaching your business objectives.
5. Explore options to access capital – There are plenty of options out there if you need an injection of cash to meet your business goals. Find the right one for you and if you need support, find the right expertise to help.
6. Keep your credit rating as healthy as possible – A positive credit rating will maximise the number of different funding options available to you. Keep an eye on your rating and be mindful of paying bills and invoices on time and keeping new credit options to a minimum.
7. Utilise the support available to you – Whether that’s internal expertise or from local business support organisations and accountancy firms – there are plenty of resources out there to help you with financial management and effective strategies.

At CJM Lumina, we work with businesses at all stages of their journey, from pre-start through to SMEs with a growth strategy and high growth potential. We understand what you need at each point and tailor our support accordingly. If you’d like to discuss your SME’s financial strategies and support for ongoing financial management – we’d be delighted to help. Get in touch with our team.