Lessons in scaling SMEs

Throughout my career I have always tried to ensure that the finance department supports the growth of the business and doesn’t create obstacles. One way to support growth is by generating cash!

Cash is particularly important when a business is growing. Growth brings challenges around cash requirements because of initial investments and higher operating costs and overheads, staff training and recruitment costs as well as delayed payments from new clients.

Securing funding is not easy for SMEs. The traditional sources (e.g. banks) are often reluctant to lend without significant security guarantees, and the more easily accessible options (e.g. invoice factoring) are often expensive.

In my experience “self-financing” is the best form of finance, and it’s amazing how many organisations don’t use it. It’s also good finance governance, involving good systems, controls and culture. It’s about effective working capital management that makes cash generation easy:

• Debtors – make sure all staff know the role they play in making sure the customer is happy and so pays up. Simple things like making sure the sales invoice is correct and goes to the right person to be approved makes all the difference, but it’s also important to have agreed payment terms and to know how to ensure the client sticks to them. And know the law around late payments and have a good credit controller!

• Creditors – pay suppliers on time, but not early. Have supplier contracts that clearly set out agreed payment terms and conditions and stick to them.

• WIP – don’t let the projects run on without invoicing for the work done to date. So many companies have cash tied up in stock and WIP because they are too afraid to ask customers for money up front.

• Fixed assets - lease, don’t buy! Cars, photocopiers, property and other fixed assets can be acquired without breaking the bank. Leasing is a form of finance where usually only the financed asset is at risk if you default.

Self-financing can take you quite a long way, but obviously there comes a point where you need proper investment finance. But when you get to that point, if you have managed your working capital well, you won’t need as much external finance as thought!

And there will be more finance options available to you.