In today’s rapidly changing business landscape, building financial resilience is crucial for the long-term success of any business. According to statistics, 60% of SMEs will fail within the first three years for various reasons, many of which link to financial health.
Economic downturns, unforeseen expenses, and unexpected challenges can all pose significant threats to a business’s financial stability. However, by taking proactive steps to build financial resilience, brands can better withstand these challenges and thrive during times when others might struggle.
Below, we’ll look at some of the best statistical-backed advice to help SMEs build financial resilience.
Establish and Maintain an Emergency Fund
Just like individuals should have an emergency fund for unexpected expenses, businesses should also have a contingency fund for unexpected costs or emergencies. This fund can be used to cover unexpected expenses such as equipment repairs, legal fees, or sudden drops in revenue. Aim to save at least three to six months’ worth of operating expenses in your emergency fund to provide a buffer during challenging times.
During the pandemic, there was a 30% increase in brands going bust because they didn’t have a contingency plan, and creditors came knocking for payments they couldn’t meet.
Diversify Your Revenue Streams
Relying solely on one source of revenue for your business can be a risky strategy. Diversifying your revenue streams can help your business withstand fluctuations in the market or changes in consumer preferences. Still, it’s something 75% of brands fail to do. Perhaps intimidated by the thought of starting a new venture, many SMEs stick to what they know in fear of failure.
Explore new markets, expand your product or service offerings, and consider partnerships or collaborations to broaden your customer base and reduce dependence on a single revenue source. One example of a new revenue stream is business trade and networking events. Many SMEs can benefit from hosting business events – networking and trade having an average ROI of 25-34% – to diversify revenue streams and strengthen existing ones. Follow advice like the 5 Ws of event planning and explore temporary staff for an event to make the day run seamlessly.
Monitor and Manage Cash Flow
Cash flow is the lifeblood of any business. According to studies, 86% of SMEs fail due to cash flow problems. Monitoring and managing your cash flow regularly is essential for financial resilience. Create a cash flow forecast and track your inflows and outflows meticulously. Implement effective cash management practices such as timely invoicing, negotiating favourable payment terms with suppliers, and reducing unnecessary expenses.
There are tons of SaaS packages on the market that assist with SME cash flow management and help with better financial clarity.
Maintain Good Credit and Relationships with Suppliers
Good credit and strong relationships with suppliers can be invaluable during challenging times. Building a positive credit history and maintaining good relationships with your suppliers can give you access to favourable payment terms, discounts, or credit extensions during cash flow constraints.
Currently, the statistics show that 2.8 million companies globally are finding themselves in financial difficulty due to bad debt – many companies acquired debt during the pandemic, highlighting further the need to secure multiple revenue streams and have an emergency fund.
Continuously Review and Adjust Your Budget
Budgeting is a powerful tool for financial resilience. Regularly review your budget and make the necessary adjustments based on your business’s performance, market conditions, and future projections. Identify areas where you can cut costs, optimise expenses, or reallocate resources to ensure financial sustainability.
One of the tips, according to HubSpot, for better financial management and resilience is to have a robust business plan that includes budgeting as part of the wider plan.
Seek Professional Financial Advice
Building financial resilience requires financial expertise. Consider seeking guidance from a financial advisor or accountant who can provide valuable insights and help you make informed financial decisions. They can help you create a financial strategy tailored to your business’s unique needs and goals. It’s common practice as companies grow to hire professionals trained in specific areas of business management.
Building financial resilience in the current economic crisis is essential. More companies than ever are falling at the first hurdle, and a large percentage of them are doing so due to financial difficulties.
