STRATEGY
For resource constrained SMEs the most important aspect is to have an efficient and effective financial management system.
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customers so as to understand what changes are required. As an essential part of this process the firm needs to carry out a formal analysis to identify its strengths, weaknesses, opportunities and threats and make a list of three to five key improvements that it can implement in the forthcoming year with clear timelines and action plans. For resource constrained SMEs the most important aspect is to have an efficient and effective financial management system. Such a system need not be expensive or even complicated and simple steps can ensure financial efficiency. Of course this also requires the firm to have a large level of financial discipline both in terms of actions (i.e. updating the information in a timely manner) as well as reporting it to decision makers so that they can take the appropriate action. First, despite any resource constraints the SME needs to ensure that important information such as sales, cash receipts and expenses are first forecasted at the start of the year so as to produce a budget. This can be done easily on an Excel spreadsheet that tabulates cash flows. Then each month the firm needs to enter the actual amounts so that it can analyse the variation (i.e. the difference between the budgeted amount and the actual). In this manner the firm can understand not only the variances in the budgets but also the underlying cause. As a result the firm can take appropriate action to reverse any negative variances while enhancing the positive ones. More importantly, such a simple budget can help the firm identify future cash flow shortages and ways to reduce costs, as well as early warning signs of other financial problems that may lay ahead such as bad debts. Cashflows are very important for all firms but especially for SMEs who may lack the financial reserves of larger firms. In order to obtain a better understanding of the cashflows, the SME can seek to understand the cash cycle that is the
period from paying for raw materials, goods or wages for products and services being delivered right through to the point when it is able to collect the payment from customers. It is important to appreciate that any delays in the cash cycle can have far reaching repercussions that go beyond just reduced profits. For instance understanding the cash cycle can help the firm assess whether its credit policies are effective and if outstanding revenue needs to be collected faster. Such an analysis allows the SME to review its billing procedures and even consider third party solutions such as debt collection agencies or factoring. Of course there are customer relationship issues involved when it comes to using debt collection agencies. However, factoring is a more feasible method whereby the firm obtains a discounted value of its invoice immediately instead of waiting for the customer to pay. The process of collecting the outstanding revenue then becomes the responsibility of the factoring company. The cash cycle can also help the firm reassess its current inventory levels and perhaps reduce stock levels by clearing out old and slow moving items. This will allow the firm to free up cash tied up in stock and to utilise within the business in areas that can increase profits. In recent years compliance has become a major issue for governments and it’s important that SMEs do not fall into the trap of not fulfilling their legal requirements. Today, most businesses have to adhere to some sort of legal compliance be it health and safety, labour, food control and so on. Therefore, now is the best time to ensure that the company is up to date with all its compliance issues and the appropriate forms have been completed, processes carried out etc. In addition, to the mandatory compliance the firm can also assess itself with voluntary compliance systems and procedures to ensure that it has adopted the best
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