SMEs need to act now to future proof their business

Julie Palmer, Regional Managing Partner at Begbies Traynor Group, says strong management is needed to deal with economic downturn. 

These are uncertain times for owners of small and medium-sized companies, with high interest rates and low consumer confidence already making things challenging. 

Interest rates, currently at 5.25 per cent, are expected to remain stubbornly high for the next five years and while it is widely accepted that they have reached their peak, the days of ultra-low borrowing costs are unlikely to return soon. 

High interest rates have a knock-on effect on SME borrowing, already limited in its options, and this impact is being seen through the drop in job vacancies. 

Persistently high interest rates are also affecting many so-called Zombie companies that weren’t investing in growth and only surviving on loans before interest rate rises made this untenable. 

It is therefore unsurprising that insolvencies climbed 17 per cent on last year in September. 

But Julie Palmer says SMEs facing up to fiscal reality can prepare themselves for the turbulent economic journey ahead. “Companies which have good, strong management across any sector will do well. I think any business that’s well managed, is keeping a really close eye on its margins and is not being a busy fool by doing turnover at low margins and can pivot when things change.” 

“It is also vital to look at proper financial information and robustly assess how accurate your forecasts are and if you need to adjust the business to fit the shape of those forecasts.” 

Early vigilance on potential bad debts will pay off

Good financial data and intelligence should also be applied to spot bad debtors and ensure cash flow is not hit by late payments. 

Julie said: “Bad debts are always a hit to a business. You need to use all the information that is publicly available to monitor your exposure. You should be carrying out all of the proper checks to ensure that they can pay.” 

Negotiating contracts that are favourable to your business is also valuable when margins are tight, according to Julie, who said that companies should be mindful of any mismatch in payment terms between suppliers and customers. 

She said: “You should always be front loading the contract in your own favour so that the risk is always with somebody else and not you. This will ensure you’re being paid in advance rather than not being paid and having your margins wiped out. 

“Also, consider if you have the best possible payment terms and try to match that with your debtors. If your debtors are paying you in 90 days and your suppliers expect payment in 30 days then you have a mismatch that needs to be funded somewhere.” 

Reach out early for help

Reaching out for help early is also crucial for SMEs who can see financial trouble on the horizon. There are a number of sources of free help available to companies who are heading towards difficulty. 

Julie said: “Even if you’re not far enough on the decline curve to want, or need, to speak to insolvency experts like ourselves, there is help and advice out there. Some of it is free – and sometimes just having a conversation can help an SME see things more clearly.” 

Keeping a close eye on competitors is also essential, she adds, and Julie advises monitoring opposition activity, how it is impacting on your own business and then ensuring that a plan is in place. 

Julie said: “What is the competition doing? Are they offering something that’s better and more attractive than what you’re doing?  

“If you’re not keeping pace with change, somebody else will occupy that space and do it much better. We have seen this with some of the large retail behemoths that have failed over the last five years.” 

Making sure you have financial packages in place to cover the cash flow issues is also vital to ensuring business survival. 

She said: “Do you have the best financial packages available to your business?  

“Traditional bank-led overdraft lending is pretty scarce now so in their absence; you are going to need something like an invoice discounting or factoring product. This will help smooth out the peaks and troughs in your business.” 

With traditional routes to finances becoming scarcer and more expensive for SME owners, many businesses have been delaying paying funds owed to HMRC, with the government’s revenue body probably underpolitical pressure not to push through winding-up petitions. 

Julie said: “We are moving into an election period and seeing an increase in company failure rates would not be a good look for the government in power. They may be waiting for the economy to pick back up again before these debts are recovered. 

“The thing I always say about HMRC is, they’re a little bit like a big grey elephant. They move pretty slowly in one direction, but then it takes quite a while for them to reverse and change direction. But when they’re moving, they tend to keep on moving quite remorselessly, so any change of tack there is worth watching.” 

Investors remain hungry to put money into solid businesses

Despite traditional routes to finance being constrained, investors remain hungry to put money into solid businesses with strong cashflows and a positive outlook. 

Julie said: “Money is in reasonably short supply in the traditional marketplace. There is however a real appetite for investment at the moment for the right businesses and there is quite a bit of money that is still not finding the right home. 

“Overseas investors are also increasingly looking to the UK for investments. They look at the UK markets and think that they are pretty undervalued in terms of equities at the moment.” 

The SME market is also seeing a growth in director fatigue, according to Julie, where having come through Covid lockdowns only to be met with high inflation and supply chain issues, many are choosing to leave their directorships. 

She said: “There has been a growth in director fatigue in that people feel as if they have had enough and want to exit their directorship. 

“They may feel that the compliance and regulatory and financial burdens on being a small business owner such that they decide they are just going to make it someone else’s problem and go and work for someone else instead.” 

For more information visit www.begbies-traynorgroup.com or email Julie Palmer on julie.palmer@btguk.com