The key challenges faced by SME businesses and how to overcome them

Reports | Start-up

SMEs account for a massive 99.9% of the UK’s 5.7 million private sector businesses and are therefore vital to a healthy economy and jobs market, as Optimum Finance CEO Richard Pepler explains.

The failure rate of SMEs remains huge with less than half surviving beyond their first five years. To set up, grow and manage a successful SME is no easy task. Owner managers face a whole host of challenges which require careful planning to overcome.

Here are some of the key stumbling blocks faced by SMEs and advice on how to avoid them.

Cash flow

Most businesses do not fail due to a lack of orders but due to a lack of ready cash. In our recent survey of business owners and senior managers, 10 per cent of respondents said cash flow had been a cause for concern in the last year of trading.

Managing cash flow in a small business can be tricky as SMEs often grapple with late payment – a trend that is getting worse with businesses with an annual turnover of less than £1m waiting an average of 72 days for invoices to be paid, according to the department for business, innovation and skills.

So how do you unlock the cash you are owed when you need it? The traditional route was to borrow from banks, but they have tightened their lending requirements. Happily, there are now a wide range of independent lenders who can provide fast flexible finance solutions.

Invoice finance providers enable SMEs to use unpaid invoices to draw the money they are owed and, where wanted, will take over the credit control, removing the stress of chasing down the unpaid invoices, saving staff time and ensuring payment is secured.

New business

Balancing running a business and good client service with seeking out and pitching for new business is difficult. Generating new business takes up valuable time but it is vital to the continued success of any SME.

A good business owner should commit a healthy proportion of their, and their staff’s, time to developing the new business pipeline. This should be reviewed on a weekly basis and relevant leads followed up.

SMEs must take a proactive approach to finding new clients, whether through networking events, phone calls, email marketing and more. This all requires a strong sales and marketing strategy.

Marketing is often pushed to the bottom of the priority list when it is essential to business growth. Think of a famous brand you admire – the likelihood is their success was built on really effective marketing.

Remember, it doesn’t matter how good your product or service is if no-one knows it exists. So, don’t be afraid to shout about it.

Lack of funding for growth

This brings us neatly on to the next big challenge – how to fund growth. Whether it is employing new staff, buying in new equipment or renting larger premises, all this requires ready capital. This again is where finding a lender who can tailor a facility to suit your individual needs can be a huge help.

But first, you must ensure you have a full understanding of the business’s financial status by making use of key planning tools such as cash flow forecasts.

Worryingly, in our survey of SMEs, we found a fifth of the businesses questioned could not predict what financial position of their company would be in three months’ time.

How can you make informed decisions on behalf of your company without a full understanding of its financial situation?

With sensible financial planning, you can decide how far to stretch budgets then work with a lender to protect cash flow or unlock capital when needed to grow sustainably.

Red tape

Successive governments claim to be ‘tearing down the red tape’ for businesses but what that tends to mean is simply further additions and amendments to existing legislation.

This means SME owner managers must stay abreast of such changes and understand the implications for their business.

This year has seen the introduction of GDPR which required a complete overhaul of the way businesses collect and store data. But the change which had a greater immediate impact on SME bottom lines was the National Living Wage increase.

This required budgetary rebalancing, whether through higher prices or savings elsewhere.

So, it seems pretty clear, the key way to overcome most of the challenges presented is good financial planning and ensuring cash flow is protected at all times. If this is in place, most SMEs will be able to ride the inevitable peaks and troughs and grow sustainably.

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