Operating a small to medium business (SME) can be a highly rewarding experience. With your hands on the pulse, there is never a shortage of action. However, such responsibility also brings a unique set of challenges and priorities. Without the backing of a larger organisational structure or various forms of funding, financial challenges tend to cause the most difficulty for smaller businesses. No matter how amazing your products, services or employees are, financial obstacles can cause even the most well thought out SMEs to hit the wall, and often this is not due to a business being in strife but actually during rapid growth too. 

Working capital is a critical component of your business’s financial health. Maintaining a sufficient working capital buffer can go a long way to helping your SME deal with the many inevitable challenges that arise from running a small to medium business. In this article, we break down four common challenges and shine light the role of a strong working capital position in helping your business navigate difficult situations.

1. Setting and Adhering to a Budget

If you fail to plan, you are planning to fail! Benjamin Franklin.

A budget is your business’ financial plan. Formulating a budget can be a difficult task for SMEs, particularly if you have a limited operating history or are in a volatile industry. A well thought out budget allows you to monitor your financial position, capital allocation, trading performance and other relevant operating metrics, as well as planning for future capital requirements. In order to stick to a budget, the plan should be realistic and achievable, estimating expected expenditures and revenues appropriately. 

Your budget should provide a pulse on your cash flow and working capital position in a timely manner, allowing you to assess your position at any time and make adjustments as necessary, cause at the end of the day a budget is not set in stone, unexpected changes happen all the time in a business, so adjusting a budget on a quarterly and half yearly basis is prudent management. While the added pressure of sticking to a budget can be daunting, it is one of the most impactful challenges to overcome as you steer your SME to success.

2. Managing Cash Flow and Capital

Did you know that more than 63% of Australian small businesses have experienced cash flow issues within the last year and that’s in a normal year, well before COVID-19 even started? It’s a staggering statistic that exposes one of the most significant challenges for SMEs across the country. Cash flow is essential to any business, big and small – suppliers need to be paid, employees are owed their wages, and landlords expect their rent to be paid on time. Without the cash to meet these payments as they fall due, your business will not have the required liquidity to continue operating. Hence, having an adequate working capital position at all times is necessary to cover your ongoing expenses and outflows. 

Consider utilising invoice finance to access cash tied up in unpaid invoices in as little as 24 hours from invoice verification

 One way to improve your cash flow and working capital position is to enhance your payment cycle, making it easier for customers to pay you and shortening their time to do so. Consider accepting more payment methods, automating reminders and otherwise improving your relationships with your customers. To further enhance your payment cycle, consider utilising invoice finance to access cash tied up in unpaid invoices in as little as 24 hours from issue. 

3. Overworked or Unproductive Staff

Many businesses are reliant on a few key staff members. Keeping your superstars happy is essential to a well functioning SME. During difficult periods, it’s tempting to cut staff numbers to minimise costs and preserve cash, resulting in the remaining employees working harder and longer. Overworking or underpaying staff increases the risk of job dissatisfaction and declining engagement – reducing productivity and the performance of your small business. A sufficient working capital position, by accessing ongoing cash, will increase your ability to pay staff on time, keep them happy and retain or hire necessary additions to your team.

4. Unforeseen Expenses or Lack of Payments

Even after implementing a well thought out budget and managing your cash flow, unexpected situations will inevitably arise. Currently, we are experiencing the impacts of COVID-19, an extreme but relevant example of an unanticipated scenario that has unfortunately devastated many SMEs. Revenue will usually experience ebbs and flows and expenses can be just as unpredictable, with 35 percent of small business owners citing this as their primary financial challenge in a recent accounting survey. Critical machinery can break, and goods can be stolen, requiring an immediate solution. An adequate working capital buffer will ensure your business is equipped to deal with these critical scenarios.

What if a customer is late or fails to pay their outstanding invoices? While invoice finance can be a great solution to access this cash upfront, the event of non-payment is also covered with TIM Finance’s (TIM) cash flow funding solutions. TIM includes a form of trade credit insurance as an additional layer of protection, so if your customer/s default on their payments, TIMSecure™ protects you by covering up to 90% of the invoice value issued to your debtor and funded as well as the legal costs to chase your client (debtor). 

Don’t let a lack of working capital hold your business back, tackle your business challenges by unlocking tomorrow’s cash flow today with TIM Finance.