September has a way of concentrating the mind. The summer holidays are over, schools are back and for business owners the long run to Christmas has begun.
For SMEs, this autumn brings an added complication. The Budget takes place on 28 October and, while speculation over possible tax changes will intensify in the coming weeks, businesses cannot sensibly plan on the basis of predictions about what the Chancellor may or may not do.
What they can do, however, is make sure they understand their own position.
That matters particularly for businesses already feeling the strain. Recent research found that 68% of UK small business owners are unlikely to make significant investments over the next 12 months, while concerns over late payment have reached a five-year high. Labour, energy and other input costs remain significant pressures.
For directors who have spent the summer hoping conditions will improve, September is a good time for a hard look at the numbers.
Start with cash
Profitability matters, but businesses fail when they run out of cash.
A realistic 13-week cash-flow forecast is therefore a useful starting point. It should run well into the final quarter and include the dates on which VAT, PAYE, rent, loan repayments, payroll and major supplier bills actually fall due.
It should also be stress-tested. What happens if sales are 10% below forecast? If a major customer pays 30 days late? If an expected order slips into January?
A forecast that only works if everything goes right is not much of a forecast.
Get on top of working capital
September is also a good time to look hard at money tied up elsewhere in the business.
Old debts should be chased rather than allowed to drift towards Christmas. Customer credit limits and payment terms may need reviewing. Slow-moving stock can consume cash just as effectively as an unpaid invoice.
The same applies on the other side of the ledger. If supplier payments are becoming difficult, ignoring calls and stretching terms without agreement rarely improves the situation. An early, credible conversation can preserve relationships and sometimes create useful breathing space.
Stress-test the cost base
Many SMEs have already absorbed substantial increases in employment and other operating costs. Businesses should now ask whether their present cost base remains sustainable at realistic levels of revenue.
That does not automatically mean cutting staff. It means understanding where money is being made and lost, whether pricing still reflects costs, whether premises and other overheads remain appropriate and whether planned recruitment or capital spending is genuinely affordable.
For a business that might eventually struggle, small changes in assumptions can make a large difference to cash requirements.
Budget-proof rather than Budget-gamble
The temptation over the next few weeks will be to wait for 28 October.
That may be sensible for some discretionary decisions, but it is not a strategy for a business already under pressure. Nobody yet knows precisely what the Budget will contain, and directors should be wary of plans that depend on certain taxes falling, costs easing or new Government support appearing.
Instead, businesses can model the effect of less favourable outcomes. What if the tax burden rises? What if borrowing remains expensive? What if customers themselves come under greater pressure?
The objective is not to predict the Budget. It is to make sure the business can withstand a reasonable range of outcomes.
Don’t kid yourself through to Christmas
For businesses already on the edge, the message is more urgent: now that autumn’s here, don’t wait until we get into winter.
The final months of the year can conceal problems. Strong seasonal turnover may create an impression of recovery even while liabilities accumulate in the background. January can then bring a nasty combination of weaker receipts and bills generated during the previous quarter.
Directors experiencing persistent cash shortages, growing creditor pressure or difficulty meeting HMRC liabilities should resist the temptation simply to trade through the festive period and hope that a good Christmas will put everything right.
The earlier financial problems are addressed, the greater the range of options usually available. These might include refinancing, negotiating with creditors, restructuring liabilities, selling non-core assets or parts of the business, or undertaking a more fundamental restructuring.
By the time cash has run out and creditors are taking action, those choices can narrow very quickly.
September is traditionally about getting back to work after the summer break. For SME owners, this year it should also be about getting a firm grip on cash, costs and liabilities. Where the numbers are already flashing warning signs, act on them while there is still time.
Written by Bea Vakharia, analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.