Five things UK SMEs can do to help grow sustainably

By Adam Harper, pictured, Director of Strategy and Professional Standards, Association of Accounting Technicians

SMEs represent the backbone of the British economy but are at great risk due to poor financial management. Exclusive research from a panel of AAT licenced accountants has found that poor financial management could cost SMEs a staggering £15,870 each year. Additionally, it’s estimated that over four in five SMEs have unqualified staff managing their finances.

In response to these findings, it’s clear that SMEs would benefit from greater awareness of financial management matters, and as such there are a range of measures SMEs can adopt to address these challenges. Here are five suggested steps that small businesses can take to improve their financial management:

  1. Set up a reserve bank account for a ‘rainy day’ fund

It is easy to underplay or overlook the consequences of SMEs failing to have access to the necessary funds to deal with a crisis. A typical example would be an unforeseen tax bill. Even simple mistakes such as missing an online tax returns deadline can trigger an automatic £100 fine with further, more punitive, fines to follow.

This is why introducing and maintaining a “rainy day fund” is essential. It prevents SMEs burying their heads in the sand. Instead, they are in a position to respond, and be able to allocate financial reserves to meet any outstanding tax liabilities.

  1. Ringfence a percentage of regular income to pay for tax and VAT later in the financial year

Planning ahead is vital for growth. Common pitfalls identified by AAT members include SMEs misunderstanding their cash flows and tax requirements, but also failing to enlist professional help when required. So to avoid these outcomes, SMEs should set aside at least 10%-20% of capital to cover taxation alongside other financial obligations. In doing so, SMEs will significantly reduce the likelihood of encountering financial difficulty. 

  1. Spend strategically to deliver growth

Alongside planning ahead, it is equally important that SMEs spend strategically to improve their overall performance; a key pillar of financial management. Any SME should be consistently reviewing their business operations, to determine their main sources of return and where opportunities and costs arise.

So business leaders should be asking themselves questions such as, is it worth spending £25,000 on recruitment or could spending this on operations such as marketing deliver better returns?

  1. Mark key tax dates on a calendar to plan ahead

It cannot be understated how important planning ahead of tax deadlines can be to help businesses avoid highly expensive mistakes e.g. fines. Many SMEs fail to fully understand how to complete their tax returns. According to the Telegraph, 50,000 businesses are currently under investigation for filling out their taxes incorrectly.

Therefore, SMEs run a great risk of incurring unnecessary costs which could potentially lead to their closure. In order to get ahead of the game, business leaders should be marking down key tax dates to ensure they have the necessary capital in place to avoid any unexpected financial crisis.

  1. Find your ‘hidden accountant’

SMEs need to work quickly and efficiently for growth, and gaining the necessary accountancy skills is crucial. Presently SMEs have two options, to either hire an external accounting contractor or to upskill staff internally.

By applying this logic, SMEs could have the answer within their workforce, an individual with the capacity and capability to be a company’s ‘hidden accountant’ who, with some training, can monitor a company’s finances on a day-to-day basis. By upskilling internally, SMEs experience a range of long-term benefits across their business cultures such as increased confidence, better analytical thinking and more gravitas with colleagues.

Why do this? Four in five accountants believe accountancy skills will be essential in the workplace in ten years’ time. Investing in your ‘hidden accountant’ represents a cost effective and efficient method of training which delivers a win-win scenario for SMEs to remain in strong financial shape and for the individual in question to gain a valuable skills set. 

The new financial year represents the perfect time to put these techniques into practice. By adopting these simple reforms to financial management and investing in upskilling, SMEs can put themselves in an exceptionally strong position to ensure they have the necessary prerequisites to deliver sustainable long-term growth.