Even though modern medicine can cure most conditions, when it comes to our health, we all know prevention is better than finding a cure. When it comes to businesses, though, there are few cure-alls. Most often, when the symptoms become obvious, the business is already terminally ill.
With SMEs, owners and managers often come from operations or sales backgrounds; their focus is on getting the next sale and getting the job done. Most are not equipped to handle areas such as planning, governance, risk management or systems. These areas get less attention and, worse, managers fail to see warning signs until it is too late.
If miracle cures are so rare, then you must avoid getting into trouble in the first place. But, how? Big businesses can simply employ specialists in key areas. Because SMEs can’t always do that, they must employ a different strategy. These days we hire personal trainers with the knowledge and motivational support needed to achieve our fitness goals. SMEs can do the same by using an adviser whose specialist training can complement the skills the business already has.
If prevention is the key, what are some of the things to avoid?
Without a proper handle on cash requirements and expected flows, you are bound for trouble. Running low or out of cash means struggling to pay suppliers, or even meet your payroll. The bank will be reluctant to lend you anything, and you will be at the mercy of your creditors or predatory money lenders. In short, welcome to panic mode. However, with proper cash management, you will have good short and long-term forecasts based on accurate information, enabling you to act on potential problems well in advance.
All business face risks; some you can insure against, others you can’t. Yet many SMEs pay little attention to potential risks until they are “blindsided”: A major customer collapses, owing the business a substantial debt they can’t recover; a major fire where the business was underinsured (who reads the fine print?). When risks are properly identified, an owner knows the extent of risk they are facing and can put plans in place. Risk management is a complicated discipline best left to specialists. Let someone you know and trust look ahead, so you can focus on practicality.
Margins, returns, overheads and systems
While it sounds complicated, the reality is no more complex than what’s on the dashboard of your car. Yet, even among finance professionals, it goes misunderstood. Do you think a race car driver could win if he or his team had no way to access or interpret diagnostics or information? Probably not.
Look at it this way: A supermarket relies on high volume, low prices (hence, low margins), and low overheads. If these get out of balance, profitability suffers. A complex engineering business may undertake only a few projects in a year. They must price their projects to win the business but also to make a profit. In the meantime, they are carrying a lot of fixed costs. If they don’t win enough work, or if the margins are too skinny, profitability suffers.
It’s not enough for a business to simply make a profit – the profit should be sufficient to cover the cost of capital, to generate a return commensurate with the risk, and to provide funds for re-investment.
If you are stuck with a business that has low margins and high overheads, you are probably on a slippery slope.
So, what does an SME do to avoid trouble? Sign up a bunch of advisers? When it comes to health, your regular GP is your first port of call. In business, you need a specialist adviser who, like a trusted family doctor, can do a thorough diagnostic of your business and provide personal, specific advice on those areas that need attention.
Martin McGrath, Consultant, VMG Capital