Finance and accounting

How can SMEs effectively manage their finances to succeed in 2023 and beyond? South East Business asks the experts…

March 2023 marked three years since the first lockdown – the start of the most challenging period for businesses since the 2008 financial crisis. Political uncertainty has made it difficult to forecast, plan and make investment decisions, and now, to add fuel to the fire, the UK is suffering a period of high inflation and low economic growth.

That being said, the business community is remarkably strong and resilient. The last quarter has seen substantial investment, with many firms forecasting double-digit growth. SMEs need to stay on top of their finances and accounting processes to weather the current economic storm, enjoy success and safeguard their future.

MHA, the UK member of global Top 10 accountancy network Baker Tilly International, is supporting businesses by offering a range of audit, tax, consulting and advisory services. “With our international reach and local knowledge, our aim is to provide the insights our clients need now to accelerate growth, prepare for tomorrow’s challenges and seize future opportunities,” says senior audit manager Aaron Hawkins.

Aaron and the team determine that businesses must manage their financial resources carefully, and to do that, they require fast and reliable financial MI (management information). “Cashflow management, and in particular, prioritising debt management, is crucial for any business, and these decisions can be the difference between a business still trading in 2024 or not,” explains Aaron. “That old line ‘Cash is king’ is sound advice, and more important now than ever. Business owners need to know what cash they have for the coming year to aid decision-making (e.g. when to invest, product line profitability, employee efficiency and how much to budget for those escalating staff salary bills).”

He adds that fraud risk inevitably increases during periods of economic downturn and cyber risks continue to be a threat as more businesses embrace cloud technologies. With this in mind, management must ensure that systems and internal controls are in place to prevent and detect fraud.

MHA provides support to businesses in a variety of areas. MHA Banking and Finance, the company’s commercial finance intermediary, plays an important part in clients’ cashflow management. “We broker refinancing, asset finance and invoice discounting, saving clients a great deal of money in the process, and have access to funders and arrangements often unavailable in the open market,” says Aaron. “On top of this, MHA Caves Wealth provides specialist independent wealth management services to support businesses to achieve their financial goals – and there’s much more, including cyber security assessment, HR advisory, recruitment, corporate finance and M&A. Whatever a business needs, we can usually help, and we are nice people to deal with!”

The easiest way to keep track of your business is through financial planning, which will help you identify potential issues before they become a problem, therefore making it possible to make informed decisions. Business financial planning encompasses a number of priorities, which include – but are not limited to – budgets, forecasting and tax planning (this could be personal tax, VAT, CIS and corporation tax), as well as any risk management that needs to be considered.

Ensuring your bookkeeping is up to date is key to effective financial planning. Annette Buss, business development director at RIFT Accounting, based in Ashford, Kent, explains: “This not only gives you sound data as to your sales and costs, but will also quickly highlight any credit control issues. The data will be the best ‘real-time’ analysis you have available and will give you valuable insight into your business’ performance. As your business grows and forecasting becomes increasingly important, working regularly with your accountant can be a valuable relationship. Make sure you are chatting with your accountant and getting the advice you require to make the best decisions for you and your business.”

But what if you do find yourself in financial difficulties? What should you do? First of all, Annette advises keeping an eye on the bigger picture. “What could you do quickly that could make a difference? For example, if the problem is credit control, maybe employ a company to assist you or look to your bank for support. Think about your processes. Which part of the business is losing you money and why? Why are customers not paying? By having strategies in place to review areas of the business regularly, you can often avoid bigger problems quickly.”

Annette’s next piece of advice is to ensure every area of the business is operating efficiently. “Do you have proper contracts (both for staff and customers) and payment schedules in place, for instance? It is worth getting these documents drawn up by a competent person, so that you know in unforeseen circumstances you are in a good place.”

She adds: “If you find that, despite your best efforts, a part of the business is not feasible, you may need to consider downsizing or closing that department or section of the business down. What’s more, if you are struggling to meet the bills from HMRC, make this a priority. HMRC will often agree to a ‘Time to Pay’ (TTP) arrangement, which will allow you to pay off any outstanding tax over an agreed period. It is important you approach HMRC as soon as possible – you will need a robust proposal and evidence that the company is viable and able to repay the debt during the agreed period.”

Last year, Talis IFA celebrated three decades of serving clients in the South East and beyond. Having grown rapidly during the lockdown years, the Ashford-headquartered company now has a team of independent financial advisers stretching from Bristol across to Broadstairs and Stevenage down to Sandgate.

According to managing director James Cole, in 2023, it is vital that SME owners have good visibility of cashflow and can identify rising costs and falling revenue – or both. “Management accounts and software like Xero and QuickBooks can help to flag these issues, giving you the opportunity to respond, but only if you keep on top of the bookkeeping,” explains James. “Comparing current metrics with last year, quarter, month, etc can then drive questions about what might need to change before it is too late. Waiting until the end of the tax year or your accounting period is all well and good, but you will miss the chance to take corrective action. If you do need to borrow money, then the lender will expect to see a professional set of books that gives them a good picture of a business owner in control. Missing reporting and filing deadlines will be frowned upon and could lead to fewer lenders considering you and/or higher rates of interest being charged.”

James stresses the importance of using all the allowances and tax reliefs that are available. If something is a legitimate business expense in the eyes of HMRC, he advises making sure the business is paying for it. Common examples are pension contributions and life assurance schemes.

James elaborates on this: “We often find that owners of limited companies are making pension contributions from their own resources, rather than from the company. Instead, you could lend your own money to the company to make a larger pension contribution for you and then take the loan back from future profits. As well as the immediate tax relief, there is no capital gains tax on growth within the pension itself and when you reach retirement, you can draw out a tax-free lump sum and/or manage the tax burden on income withdrawals. In the event of your death, whatever is left in your pension fund can be inherited by your family. Finally, the money you have paid into a pension is usually protected from creditors in the event of liquidation or bankruptcy.”

For James and the team at Talis, the most exciting announcement in the recent Budget was the ability to make higher annual pension contributions and the removal of the controversial Lifetime Allowance (LTA). “Coupled with the fact that pension funds are usually not assessed for inheritance tax (IHT) it makes for a really useful estate-planning tool, as well as funding your own retirement. Speaking of which, most business owners will be aware that a trading company should qualify for business relief (BR) from inheritance tax, but if you sell and put that cash in the bank, the situation on death could well be different. There are legitimate ways to mitigate against this, but it needs careful planning in advance.”

Business certainly hasn’t been plain sailing since the outbreak of the pandemic. Reward Finance Group is finding that many SMEs in the South East region are turning to commercial finance in a bid to either return to pre-Covid levels of trade, ease cashflow challenges or identify new opportunities for growth. “Now more than ever, the requirement for non-bank, alternative funding is high. For many, a short-term injection of finance provides that certainty to find business solutions to challenges at a time when the economic situation is unstable,” says Simon Adcock, Reward Finance Group’s regional director for London and the South East.

Reward Finance Group structures funding solutions using assets – on and off the balance sheet – quickly, to provide the necessary working capital SMEs desperately need. “We provide firms across the South East with tailored business finance loans and asset-based solutions of between £50k and £5m,” explains Simon. “Working closely with our network of brokers and other professional advisers in the region, we recently reached a key business milestone by growing our regional loan book to £15m, having opened our operational centre in the capital late last year. During that period, we have supported over 40 firms across the region by providing the working capital to drive increased revenue, innovate, create new jobs or navigate through a difficult trading period.”

Simon’s advice to business owners is to always focus on the bottom line. He says there is little point chasing turnover if you are not going to make a profit – that’s why you set out in business after all. “Assign key performance indicators and be aware of both the competitive landscape you operate in and the wider economy, and how they may influence achieving these targets. Gross margin, net profit and cashflow are integral and focusing on them is key to any successful business. If you can build a cashflow forecast, with some sensitivities built in, you will see in advance when you have cash surplus and when money is tight and needs addressing. If you cannot put this together, ask your accountant for some help as their job shouldn’t be just filing your year-end accounts. They have a wealth of knowledge and I would advise any business owner to tap into that.”

Be on top of your business, says Kreston Reeves

The team at Kreston Reeves, a leading South East-based accountancy, business and wealth advisory firm, recognise that ambitious and scale-up businesses have, without doubt, faced a challenging three years. However, their ability to pivot and adapt has seen them emerge with confidence. Despite continued questions over the economy, businesses are positive for the future,

SMEs do, however, continue to face many challenges. Soaring energy costs, the cost-of-living crisis and the ability to attract and retain staff are often top of that list. “It has never been more important to keep an eye on cashflow – the lifeblood of any business,” explain Dayle Rodriguez, systems advisory manager, and John Walsham, business development consultant at Kreston Reeves. “It is said that founders need to be ‘on top of their business’ and not just ‘in the business’. This remains ever more so in an uncertain economy.”

They say it is understandable that founders involve themselves in every aspect of their business, but those with ambitious growth plans know when to delegate and make strategic hires, giving themselves the space to manage and lead. This becomes paramount when a business seeks angel or VC funding.

At the heart of being ‘on the business’ is good and regular management reporting – now easily available with online accounting software. Scenario planning can also help founders identify and plan for future events that might have an impact on their business and its finances. A good accountant will help shape and interpret both.

So, what should a founder look for when choosing their accounting partner? Dayle and John advise: “Your accountant should take the time to understand your business – and we don’t just mean the numbers. Do they understand the industry you work in and the products or services you provide, as well as your vision and goals? Do they have expertise within that industry and the specialist advisers you may need for funding or international trade, for instance?”

On a final note, they add: “Founders need an accountant who can keep them up to date with important changes and who is happy to spend time with them to address questions or concerns. You will want an accountant who is forward-looking rather than focusing on last year’s trading numbers.”

Advice from Crowe UK

Crowe UK is a leading Kent-based audit, tax, advisory and risk firm providing comprehensive and tailored services to SMEs across the UK. The team identify that many businesses are under pressure, and will need to keep a sharp eye on cashflow and margins to ensure they continue to trade profitably and remain solvent.

“At Crowe UK, we understand that businesses face unique challenges, which is why we offer personalised services that are tailored to meet each client’s specific needs,” explains tax partner Simon Warne. “Our approach is focused on building long-term relationships with our clients, providing ongoing support and guidance that helps them achieve their business objectives.”

Here is Simon Warne’s top advice for 2023:

  1. Assess risk – ‘Feel the fear’: It’s important to understand what might go wrong and what can be done about it. If it all goes right, was the return worth the risk? 
  2. Understand your own business finance: It’s more than just accounts and cash. An understanding of cashflow and tax impacts can really help in a dynamic environment such as the one we live in today.
  3. Make business friends: Business owners often express feelings of loneliness but reaching out to others can help share problems.
  4. Be polite – show gratitude: Be grateful for everyday interactions and experiences. They keep you grounded.
  5. Keep an overview: Your money and success aren’t going to do you any good if you’re not around to use it so stay healthy and keep alive those out-of-work interests like family and hobbies.

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