How to Prepare your Business for Growth in One Easy Step: Saving
We look at the importance of including savings into your business' financial planning
One of the major barriers to small and medium sized business’ growth in England is accessing the resources required to evolve and expand. Many business leaders build their business with lofty aspirations for the future, but a couple of years in find themselves plateauing instead of growing.
Although this is a fairly common fate, it’s not necessarily one that needs to befall all small businesses. In fact, the one way to stop this from happening is to nail financial planning from the outset.
In this post, we’ll look at the whats, whys and wherefores of savings for business.
Fail to prepare, prepare to fail
Companies that draw up a business plan with clear-cut aspirations for the future stand a far better chance of making provisions to support, and therefore achieve, their vision. If the 2008 financial crisis has taught us anything, it’s that SMEs can’t simply rely on the big high-street banks to deliver loans when they need them, and though alternative finance solutions are emerging all the time – these are not always the most appropriate solution.
For this reason, SMEs targeting growth within the coming years should really consider how they could be building cash reserves themselves for when the time comes to draw on them. At present, only two per cent of firms are believed to have cash readily available to reinvest – a figure that could be costing the UK economy millions in lost opportunities for small business growth.
The importance of saving some of your business’ finances
In the current economic climate, it’s true that savings no longer glean the kind of return they used to, when account holders could expect to see as much as five or even ten per cent interest. However, something is always better than nothing, and building cash reserves in a savings account is without a doubt the most risk-free way to do it.
One thing to be said about business is that nothing ever stands still, and you can bet your bottom dollar that your competitors are always looking for a way to inch ahead in the market. This might be through investment in new state-of-the-art equipment or streamlining software processes to achieve an end goal with less financial outlay. Likewise, when that big opportunity comes a-knocking, imagine how much easier it would be if funds were already available to take advantage of rather than having to drum up the cash from scratch.
Either way, if you disregard the importance of having your own funds on when the time comes to reinvest, you run the risk of being left behind.
Savings? Yeah, right…
To some small businesses, putting aside cash reserves might seem like a pipe dream. Many start-ups and young businesses can comfortably get by month-to-month but have very little in the way of surplus cash. In fact, according to a study of 450 small and medium enterprises found that the amount of readily available capital that businesses have to reinvest for growth is actually down from what it was in 2009.
One way to do it is to balance the cost of investment for, say, new IT equipment or expanding the team, against an achievable amount to deduct from your forecasted monthly takings when drawing up the annual budget. In other words, treat savings like a monthly bill like rent or wages, transferring a set amount each month without question.
This way, you won’t feel like you’re making a sacrifice each month and savings just become like any other commodity that needs to be paid without question.
The age of debtors
The deficiency of cash available might, in part, be explained by the dramatic increase in the instance of late-payment since 2009. Five years ago, almost 20 per cent of small businesses reported that debtors were paying quickly, in contrast to the eight per cent that would say the same today.
Unfortunately, late payment is something that affects most small businesses in the UK and is largely out of their control. There are a couple of ways to ensure this doesn’t affect your business as much as it can on – the first being to build up a pot of savings that can be drawn on when required.
The other is to implement some sort of invoice finance arrangement, where a lender essentially takes on a company’s unpaid debt in exchange for a percentage of its value. Although this means relinquishing a proportion of profit, it does offer SMEs the opportunity to get a steady handle on their cash-flow – something that’s hard to overstate the value of for both business stability and growth.
The bottom line
Businesses that have some financial reserves to draw on will always be in a better position than those that don’t to weather any financial storms and keep a steady flow of cash through the business. This in turn gives them a far more stable footing to harness opportunity when it comes along.
Setting aside business savings does not always take top priority for small and medium businesses, particularly in this economic climate where businesses often have to battle against late payers just to make ends meet. However, it’s difficult to overstate the value of steadily building a pot of cash to make those steps towards business growth achievable. Plan to do this and you’ll find your dreams of growth start to look much more like reality.