According to recent research, 50% of SMEs fail in the first year, and an additional 95% small start-ups failing within the first five years. And while there are many many reasons that contribute to these unfortunate failures, such as lack of market demand or poor customer service – a company’s financial situation and the financial decisions that companies make are often a significant contributor.
In this article, we’ll be exploring the five avoidable reasons SMEs and how you can avoid making the same mistakes with your small business.
1. Not having a cash buffer plan
One of the most fundamental reasons SMEs do not stay afloat is a lack of cash buffer or a back-up plan. For small businesses, this is one of the greatest pieces of advice we could offer. When a challenge arises – no matter how big or small – an SME needs to be in the financial position to continue to invest and stay afloat.
Having a back-up plan, additional cash or ‘cash buffer days’ can help to provide that safety net for smaller companies. Indeed, one additional cash buffer day can have a surprisingly significant impact, even reducing the likelihood of failure that following year.
2. Not being adaptive to change
If there is one take-home from 2020 and 2021, it’s that businesses need to be able to adapt - quickly. Many reports have begun digging deeper into the changes companies made to remain successful in 2020 and a lot of attention is brought to their ability to shift processes, automate, digitalise or invest where needed to keep going. Though this change is largely situational to the (hopefully) one-off, extreme scenario of the global pandemic, it highlights that speed and change management is critical for success when the going gets tough.
Further, even when the going isn’t that tough, staying on top of the trends and the expectations of businesses is key to being ahead of the curve and staying relevant.
3. Cash flow
From the moment a new business launches, cash flow is #1 priority.
However, whether due to late payments, late invoicing, over-investment or another pitfall – cash flow is a common challenge for small businesses and can be the nail in the coffin. Indeed, 38% of small business owners have been unable to pay debt due to cash flow problems. Staying on top of your cash flow is fundamental.
Here’s 6 quick tips to improve your cash flow:
· Assess your finances
· Reduce your expenses
· Sell more and invest in your business
· Update your payment terms
· Consider getting a loan
· Consider outsourcing
4. To hire or not to hire?
The success of a company is often said to be down to the people. The people that you hire can have a wonderful or detrimental impact on your business dependent on their fit – and that’s if you have any employees at all! 80% of small businesses have no employees, while only 7% have 5 or more. This might be because SMEs find it harder to find qualified individuals for hire that are suitable for the role.
You might be wondering - is employing worth it? According to recent research, employing companies typically fail less frequently than non-employer firms. With the right fit, hiring can take the strain off your small business and let you expand and grow.
5. Lack of financial guidance or understanding
Finally, many of the above reasons on this list can be easily avoided with greater financial understanding or guidance, providing the ability to take financial risks. But for many SMEs or start-ups, getting the correct guidance is an expense that is often not prioritised as it should be… until a crisis point occurs.
Prevention is key, so keeping up to speed on SME financial best practices or seeking financial guidance from an expert might be worthwhile early on to ensure your business remains financially sound.
Whether that means hiring a Financial Director that will help to guide your company in the right direction, or outsourcing individual tasks to a Financial Expert, getting that guidance and expertise will help keep your business in the best possible position to grow and move forward.
There is a significant amount of contributing factors as to why some small businesses fail, many of which come down to a lack of financial organisation or simply making the wrong financial decisions. While following financial best practices won’t guarantee your business to remain a success, it will certainly provide you the greatest opportunities to continue to invest in your business and overcome challenges you might face.
At The Finance People UK, we offer our guidance and expertise across various financial services, such as Cash Flow Management, Crisis Management, Flexible Financial Outsourcing, Outsourced Accounting Services and more. We aim to help small businesses get the very best finance resource for their budget. Further, we also offer Finance Recruitment, helping clients and candidates with their finance director jobs search across the UK.