With the UK's banking community left shaken in the wake of the credit crunch, small and medium-sized businesses are having to review their funding arrangements as banks raise interest rates and introduce tighter lending criteria.
The Institute of Financial Accountants (IFA) is the most well-renowned financial management professional for SMEs. It's currently doing everything it can to help small firms, most of which are experiencing some level of reduction in turnover and cash flow. Promoting small business success, reducing business rates and charges and increasing access to customers is the responsibility of the government. Supporting the professionals that run and work for SMEs is part of the remit of professional membership institutions such as the IFA.
IFA's revealing business survey
The IFA's Business Barometer Survey of members' opinions, published earlier this year, concluded that the biggest challenge faced by business in the current climate is cashflow and reduced turnover. Respondents felt banks should lend responsibly and be under more pressure from the government to do so.
The survey also revealed key points in a whole range of areas. Respondents felt that banks should have more in-depth knowledge of their customers' particular fields of business to prevent them taking unnecessary risks. Ease of use was also a recurring theme, with tax and VAT systems regarded as too complicated and regulations on employment and health and safety too stringent. Increasing IT training to allow businesses to complete tax returns and other accountancy documents was suggested as a solution to these problems. Insolvency laws, meanwhile, were felt to be unhelpful to small businesses, and people surveyed felt directors should be made personally liable when a judgement is granted against directors.
"We are living in difficult and uncertain times and there is clearly a need for SMEs to work with their advisers, including accountants, to maximise cashflow management," says IFA Chief Executive, David Woodgate, commenting on the survey. "The IFA collaborates with other financial organisations such as the Institute of Credit Management to devise tips and advice for businesses to help them ensure that their money ‘works harder' for them during the credit crisis."
Managing cash flow
Cashflow is critical to business survival - ensure you're managing your company effectively with the following pointers.
Know your customer - Who are you trading with? Is it a limited company, a partnership or a sole trader? Check credit agency reports and references and talk to their existing suppliers.
Getting paid - Non-payment is, of course, a serious threat to your cashflow. Formally agree payment terms in advance and confirm in writing. Devise a strategy for dealing with customers who demand longer to pay.
Invoicing - This is the vital first step for a healthy cashflow. Send your invoice immediately after supplying goods or services. Make sure disputed invoices are investigated and resolved straight away. Ensure sales invoices are fully compliant with HMRC guidelines and VAT requirements.
Treating suppliers fairly - It's good business practice to pay suppliers on time and demonstrates Corporate Social Responsibility. Failing to pay on time could damage a supplier's business or cause it to fail.
Credit Insurance - What is the risk of your most important customer's business failing? You can protect against non-payment or insolvency with credit insurance. Good credit insurers can often provide detailed information on prospective customers and access to cheaper business financing.
Finance facilities - Managing your cashflow and ensuring the funds are there when needed means having longer payment terms from your suppliers than you give your customers. Otherwise you will need finance facilities such as factoring, invoice discounting, a bank overdraft or shortterm finance.
Chasing payments - Follow up nonpayments quickly with a letter, email and telephone call if the amount is large or you are concerned about the customer's solvency. Check that they have the invoice, that it is accurate and states how the payment should be made.
Running low on cash - Obviously, if you run out of cash you can't pay your suppliers, wages or overheads, and your business will fail. Keep an updated cashflow forecast, so you always know you have enough money to meet your commitments.
Taking legal action - When all else fails and a payment owed to you becomes a ‘bad debt', you can take legal action. You can use a solicitor or a debt collection agency (although this is a more expensive route). You should first issue a statutory demand to be followed up with a bankruptcy, or winding up order if the debt is £750 or more. If they still don't pay they may become insolvent in which case you are less likely to get your money.
If your customer goes bust - The debtor's assets are divided amongst the creditors. Depending on the decision of the court, there could be an Individual Voluntary Arrangement where payment is made over time through a licensed insolvency practitioner. In a Company Voluntary Arrangement, where the directors retain control, the company arranges to pay the debt through a legally binding agreement.
For the best chances of success, prudent and sound management practices such as these are essential and will yield the best source of funds. Collaboration and seeking advice from experienced entrepreneurs will bring new opportunities by sharing risks and rewards. However you decide to fund your business, make sure you shop around and understand the risks involved as well as the rewards.
For more information please visit www.ifa.org.uk/home
