31/01/2013

By Sancho Simmonds, Assurance and Business Services Partner at Smith & Williamson

Businesses don’t go bust because of a lack of profitability. They go bust because they run out of cash!

Sadly, many entrepreneurial businesses fail in their start-up and development phases and even mature businesses succumb from time to time. There are many reasons for this. Some businesses simply have poor strategies. Some are overtaken by the advance of technology. Others have poor management, often particularly evident in the financial area where entrepreneurial businesses can be prone to minimising or cutting ‘back office’ costs to the bone. Beware! This kind of penny pinching can often be fatal.

So while entrepreneurs are often 100% focused on achieving their wider goals, someone needs to be responsible for keeping the financial score.

It’s worth remembering that it’s not just bad businesses that run out of cash. As we have already identified, many earlystage entrepreneurial businesses are consumers of cash. And, perhaps counter intuitively, cash flow difficulties can just as easily arise from rising as opposed to falling sales. Believe it or not, falling sales can often drive more cash into a business.

So cash is king! This may be a cliché but only because it’s true. In order to build sustainable businesses, entrepreneurs must live by this mantra. They must effectively manage their cash in order to build firm foundations and keep their organisations in good financial shape.

In order to do this effectively, it’s not just the management of the incoming and outgoing cash that needs close attention. It’s also the management and control of a raft of other financial data. Effective financial management should not just help a business to survive. It should help it to grow and prosper.

“Fundamentally, a business must be able to understand and monitor its financial dynamics,” says Giles Murphy, Head of Assurance and Business Services at Smith & Williamson. “This requires up-to-date, relevant and accurate management information which can be compared against budgets and comparatives from previous years.”

While the generation and preservation of cash will always be the number one priority for all businesses, they also need to consider how to invest in the future. The entrepreneurial business therefore needs to establish a balance between investing in growth, managing costs and, for most established businesses, maintaining and improving profitability.

In order to achieve this in your business, you will need a clear understanding of your current and future finances, including:

– the basics – recording and tracking your results
– budgeting and forecasting
– management information and key performance indicators
– key financial ratios and phrases
– protecting your assets
– focusing on profit
– collecting your debts
– keeping the bank on side
– investing in the future

For help with financial management, or advice on how to set-up and maintain essential financial controls in your business, contact Sancho Simmonds on 020 7131 4590 or email sancho.simmonds@smith.williamson.co.uk.

Disclaimer

By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.

Smith & Williamson LLP

Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.A member of Nexia International.

The word partner is used to refer to a member of Smith & Williamson LLP.

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