What are the consequences for SMEs & Entrepreneurs?

Good financial management is the foundation to reach profitability for any business. But as a start-up or small business, your first thought inevitably is growing sales.

This emphasis can lead to major issues later. It is frequently the case that as soon as businesses begin to grow, their accounting systems and processes fail to scale and evolve at the same rate.

With the added compliance requirements for VAT to be considered, the risks are greater if unaddressed.

So how do you identify these issues? If they occur, how do you put actions in place to correct them and minimize any negative impact?

What could cause mismanagement of your finances?

As with any business issue, the first step is always to look for potential risks, identify the root cause and understand how to control them.

Every business has organizational procedures used to set up its financial model. This may have evolved or started with some planning. It may not have been refreshed for some time. Nevertheless, there are some common causes of mismanaged finances:

• Time Constraints – When you’re overwhelmed with running a business, it is easy to focus on urgent issues. It is normal to defer your financial responsibilities. Deprioritizing those accounting tasks and reviews may seem necessary. But the more you delay, the less accurate your financial management.

• Resource Constraints – If you cannot afford to hire senior financial people, you will not have the resources to deal with the bigger financial picture. If your bookkeeping is focused on hygiene and compliance tasks, this may not be enough to help you provide a resolution either if you face challenges.

• Process Discipline –Your financial model and system have to be clearly defined. For example, if you mix your business and personal finances, this makes managing your company financials far more complex. If expenses are entered late, you may miss costs or cash flow obligations.

• Technical Expertise – Finance can get complicated especially with the changing Tax regulations. Do you have the right experience, training focus, and IT capability to manage an evolving finance function?

• Budget & Tracking – Financial planning and performance reviews are essential to conserving your precious cashflows. If you have not set and regularly measuring performance against budgets, you will likely face challenges in adapting to changing markets.

What effect can mismanaged finances have?

Why is this a critical issue for urgent attention? In summary, if you are not in control of your finances then you are not fully in control of the business.

What effects can this lead to?

• Poor quality and slow financial information – If your financial information is poor, you won’t have reliable data to manage your business. Without accurate numbers at your fingertips, you cannot make informed decisions. Your forecasting and projections will be incomplete and you will fail to act on opportunities and risks.

• Cashflow problems – You are also likely to have cash flow issues. Negative cash flow is one of the biggest causes for new or smaller businesses failing within the first two years. In recent research by CB Insights, 29% of failed start-up founders blamed a lack of good cash flow. Improving your liquidity management helps to secure your long-term future.

• Compliance & Personal Risks – Poor control of your financial management can also impact directly on the directors of the company. If compliance rules are not met (specifically under the VAT Executive Regulations), this could mean fines for the business (and possibly personally).

• Credit Worthiness – Information may need to be provided to banks, investors, and creditors. Poor compliance results and fines can have a destructive effect on your credit and attractiveness to investors

• Ability to adapt – There is the potential mismanaged finances lead to a lack of agility. This can reduce the ability to seize market opportunities. Your business needs a competitive edge and having resources to capitalize on opportunities can make the difference.

As a business, innovations in cloud technology present enormous opportunities to create a sophisticated financial management model with minimal costs. Best practices are now embedded in platforms to reduce costs and deliver quick results. Therefore there is great scope to enhance and improve your financial operation.

Getting Back In Control

If your business is experiencing any of these issues, what is the best strategy to get back on top?

Harness Expertise – As a business owner you are best placed to value your time and focus your expertise. If you get involved in executing complex financial changes, this can divert your focus. You may not be fully qualified to do it correctly and quickly without best practice support.

Plan For The Future – A cloud accounting system is an excellent way to improve your financial overview. Ensure you implement the right systems with the correct setup and reporting from the start. This can avoid getting into potential difficulties creating detailed financial reporting and forecasting. Use your data to generate forecasts and plan your future strategic decisions.

Pause & Fix – If you’ve been through your finances and found issues, it is vital to take control. Fix them permanently with some care. Do not be tempted to ‘sticky tape’ them. It’s vital to also review and update the processes that lead to these issues and not repeat them.

Invest time now – You need to schedule a realistic amount of time to work on the problem. Make your financial reporting an asset. Allocating sufficient time and focus will save you time, stress, and issues. Finally ensure you have the best systems, tools, and people in place to crack the problem. It will cost you more when extra resources have to be brought in later.