Small and medium-size enterprises (SMEs) play a crucial role worldwide. They account for about 99 percent of businesses, and 70 percent of jobs in OECD countries. SMEs are critical in creating employment opportunities and stabilising the economy, yet they’ve suffered increasingly challenging conditions in recent years. This article explores the effect of recent events on SMEs and looks at what business owners and entrepreneurs can do to maximise their working capital to build stability and growth.  

A report by the Bank of England which reviewed data from 2 million SME’s showed a 30 percentage point reduction in turnover growth for the average SME as a result of COVID-19. Consumer facing sectors were hit particularly hard. Recent inflation, interest rate rises, and impacts from Brexit have all increased costs for SMEs, particularly the recent new trade agreement checks, which could cost businesses that import goods over £2bn per year. Rising prices for goods and services, increasing wage bills, and fuel costs have also taken their toll. 

Working capital is the lifeblood of these businesses, enabling them to cover day-to-day operational expenses, invest in growth opportunities, and weather financial storms. It can help SMEs pay suppliers, cover bills, expenses, and salaries, and adapt swiftly to market changes. It can also provide growth and expansion opportunities and allow for funding of new staff, equipment, and technology, as well as the potential for exploring new products and new markets. 

For SMEs, however, managing working capital can be particularly challenging for several reasons, such as resource and cash flow constraints. Here we share some top tips to help SMEs maximise their working capital. 

Regularly review cashflow 

Maintaining good financial health is not just about recording incomings and outgoings, but also accurately forecasting to be able to confidently plan ahead. Spending reviews highlight opportunities to streamline your business, and conducting these regularly will stand your business in good stead for the long term.  

Managing cash flow effectively reduces financial stress, and as a business owner, you’ll sleep better knowing that your company’s finances are in order. A clear picture of your cash flow enables informed decisions so you can plan for expansion, make the most of new opportunities, and weather economic downturns more effectively. 

To develop accurate cash flow forecasts, leverage historical data by analysing past patterns and identifying peaks and troughs to anticipate likely shortages and plan for these. Prepare for various scenarios by assessing the potential impact of different market conditions or circumstances and formulate contingency plans to help you weather the storm.  

There are many cash flow forecasting tools available that can help you generate accurate projections. 

Minimise expenses and maximise efficiency 

Maximising efficiency is critical for SMEs to keep their cost base low. Start by conducting an efficiency audit of all your operational, manufacturing, and production processes and procedures, to identify bottlenecks, redundancies, or areas for improvement. Set clear efficiency metrics to measure performance, and regularly analyse these metrics to ensure you stay on track.  

Regularly review expenses and identify cost-saving opportunities such as reducing unnecessary business travel, printing costs, or unused office space.  

Many UK businesses are now adopting lean methodologies that focus on identifying and eliminating waste whilst improving processes and increasing value for customers. The benefits of these methodologies not only include increased efficiency and reduced costs but often provide additional benefits such as helping to meet sustainability goals or green agendas. 

Inventory management 

Inventory management helps SMEs maintain optimal stock levels, ensuring that products remain in stock, yet keeping inventory levels lean, which prevents funds from being tied up unnecessarily. Less stock also means less storage costs. 

Organising and categorising your products is the first step towards successful inventory management. Tracking and forecasting your inventory levels helps ensure you maintain just the right amount of stock. Software that tracks your deliveries and sales in real time, often using barcodes, is a good investment that will likely provide long-term value.  

Accounts receivable and accounts payable optimisation 

When and how customers pay for products and services will directly impact your cash flow, and one or two late payments can have a big impact on a smaller business. A report conducted by the UK Government in 2022, showed that SMEs were owed an average of £22,000 in late payments, a significant cash flow challenge for these businesses. 

Ensure you review your payment terms in line with cash flow requirements and set clear credit policies for your customers. Put in place a robust process for following up on all outstanding invoices, considering different types of communication such as calls, emails, and letters, and be prepared should you need to seek debt recovery services.  

Some companies consider ‘factoring’ which allows them to sell outstanding invoices to a third party at a discount and access cash quickly, without having to wait for customers to pay their invoices. 

Where possible, negotiate favourable or extended payment terms with suppliers, and take advantage of early payment discounts. Prioritise supplier payments based on due dates and cash availability. 

Automating accounting functions results in fewer physical errors, better management of financial data, and faster payment, as well as reduced processing costs. Because accounts payable automation improves the speed of processing invoices tenfold, estimated savings are in the region of $16 per invoice, depending on the size and nature of the business. 

Embrace technology 

As outlined above, technology such as automation can significantly reduce costs for small businesses. Digital transformation covers a wide range of areas, such as cloud computing, which allows businesses to scale resources as needed without the hassle of physical infrastructure, and implementing CRM systems which help businesses manage customers, sales, and marketing efforts more effectively. Supply chains can also be digitised to provide real-time visibility from point of origin to point of delivery, reducing wastage and improving timescales. 

Consider working capital finance 

Access to finance has been a long-standing barrier for the UK’s 5.5 million SMEs. Previously, small businesses impacted by COVID-19 could apply online for funding support of up to £50,000 via the Government’s Bounce Back Loan Scheme (BBLS), but this is no longer available.  

The high street banking system is concentrated, centralised, and non-relationship based. Large banks dominate SME lending but often fail to cultivate long-term, supportive relationships with business customers. 

A specialist broker, such as ourselves, will have access to a wider range of private banks and lenders that offer working capital finance, often with direct access to the most competitive sources of finance for SMEs. Because of their relationships with these lenders, they’ll be able to negotiate competitive terms on your behalf and meet unusual and complex working capital loan requirements. 

Working capital loans help your business manage cash flow or provide extra capital to help you scale. This type of corporate finance can also provide opportunities for your business to invest in growth by hiring new staff, increasing stock levels, or expanding into new markets or services. Finance can be particularly relevant for seasonal businesses that may experience periods of lower than usual demand.

Remember that working capital isn’t just about having cash to hand; it’s about managing the balance between current assets and current liabilities. By maintaining a healthy working capital position, SMEs can weather unforeseen challenges and maximise growth opportunities.

Each business situation is unique, so it’s essential to assess specific needs and tailor strategies accordingly. To discuss working capital finance in more detail, please contact Scott Monks our Head of Corporate Finance.