Navigating Uncertainty: Financial Resilience for SMEs

If you're a business owner finding the current climate challenging, know you are not alone. Operating an SME can feel relentless, with uncertainty clouding every decision. SMEs are currently facing several powerful economic headwinds: 

• Persistent Inflationary Drag: While the rate of inflation may be easing, the cumulative effect of past price increases is significant. Unlike larger corporations, SMEs lack the bulk purchasing power to fully absorb rising costs across raw materials, energy, and labour. The rise in both National Insurance contributions and the National Living Wage is making it more expensive for SMEs to recruit, which can slow growth. 

• The Cost of Capital: Driven by efforts to control inflation, higher interest rates make the cost of borrowing significantly more expensive. Simultaneously, traditional banks have become increasingly risk-averse, making it harder to secure working capital or investment loans than it has been in years. 

• Economic & Geopolitical Instability: Slow domestic economic growth means both consumers and businesses are exercising greater caution, which has a direct, detrimental impact on demand. Furthermore, escalating geopolitical tensions add layers of complexity and risk, particularly for those SMEs engaged in international trade or reliant on fragile global supply chains. 

Taking Control  

When facing so many external factors you cannot control, my advice is to focus your energy on what you CAN control. 

1. Cash Flow Visibility  

In my opinion, this is non-negotiable if you wish to build a resilient business. 

• Develop Rolling 13-Week Cash Flow Forecasts: Move beyond simple monthly budgets by creating rolling 13-week forecasts based on actual anticipated inflows (cash coming in) and outflows (cash going out). This level of detail provides clarity and allows you to identify any impending shortfalls weeks in advance, as opposed to days, and ensures you can meet all your upcoming obligations, such as payroll, rent, supplier payments, etc. 

• Optimise Accounts Receivable (A/R): Start to think of cash tied up in unpaid invoices not as profit but as an interest-free loan to your customers. Spend time chasing overdue invoices and, where appropriate, start requesting upfront payments or deposits to help accelerate the cash conversion cycle. 

• Free Up Trapped Capital: Conduct an audit of your inventory. Do you have slow-moving or surplus items? A strategic sale or clear-out campaign can liquidate this surplus stock, converting a frozen asset into usable cash that helps build your essential cash reserve. 

 2. Monitor Key Performance Indicators (KPIs)  

 To react quickly to volatility, you need to monitor the right metrics.  These metrics will be specific to your business and industry; however, all companies should track: 

• Operating Cash Flow: The net cash generated from your core business activities. 

• Working Capital Trends: The difference between your current assets and current liabilities (essentially, the short-term liquidity available to run your business). 

• Debt Aging: A detailed breakdown of how long your customers have owed you money. 

• Gross and net profitability: Gross profit shows how efficiently a company produces and sells its products before overheads, whilst net profit reflects the company’s overall financial health and ability to generate profit after all costs. 

• Customer metrics such as retention rates: A high retention rate shows strong customer satisfaction and loyalty, which often leads to higher lifetime value and lower marketing costs. 

• Operational Efficiency, such as employee productivity, indicates how efficiently staff contribute to company performance. Improvements often come from better processes, technology, or training. 

• Employee Engagement: High engagement often correlates with better productivity, lower turnover, stronger customer service, and improved financial results. 

• There is also an increased importance placed on sustainability metrics. 

3. Optimise the Cost Base  

• Conduct a Deep Expense Audit: Go line-by-line through your operational expenses to identify areas of unnecessary spend or opportunities for more competitive supplier contracts. A true understanding of your unit costs is vital for setting resilient pricing. I have written more about costings here. 

• Diversify Your Supplier Base: Over-reliance on a single vendor, particularly one in an economically or politically unstable region, introduces a high level of concentration risk. Diversifying your suppliers significantly reduces the risk of disruption and gives you stronger leverage for negotiating better contractual terms. 

• Diversify Your Customer Base:  This helps protect the business during periods of uncertainty by reducing reliance on any single client or market segment. A broader mix of customers spreads risk, stabilises revenue, and improves cash flow resilience if demand in one area declines. It also opens new growth opportunities, encourages innovation, and strengthens the company’s ability to adapt to changing market conditions. 

 4. Build a Proactive Resilience Strategy  

It’s not easy for small businesses, where day-to-day demands leave little time to step back and focus on the bigger picture. However, setting aside time to consider the following areas can be a worthwhile investment. 

• Scenario Planning: Explore a variety of hypothetical disruptions—geopolitical, economic, and operational. For instance, what is your plan if a key material price increases by 15%? Or if a tax rate suddenly changes? By stress-testing your financial model against these scenarios, you can rehearse your response, allowing you to react strategically rather than in a panic. A SWOT analysis is an excellent starting point for systematically identifying these internal and external risks. 

• Establish a Crisis Management team: Form a small, agile group that includes key people from across the business. This team should regularly review and test your contingency plans to make sure the company can keep running smoothly during major disruptions (such as supply issues, regulatory changes, or unexpected crises). 

• Explore Diversified Funding Sources: Given the increasing risk-aversion of traditional lenders, you must look beyond the bank. Investigate alternative financing options like government-backed grants, peer-to-peer lending platforms, or equity crowdfunding to secure the capital you need for growth. 

You can’t eliminate all uncertainty — inside or outside the business — but by staying on top of your finances and knowing exactly where you stand, you’ll be in as strong a position as possible to act quickly when needed. 

If you need help with any of the above, please don't hesitate to contact me, as we love to deliver financial order, efficiency, and understanding by providing flexible, part-time finance director expertise and bookkeeping services.