SMEs are the lifeblood of the UK economy. They stimulate economic activity, create jobs, drive innovation, increase competition and contribute largely to the overall progress of the country. Yet, in order to survive and thrive, business owners need accurate, reliable and timely financial information, whether that be profit or cash focused, or both, to accurately and effectively manage the company’s finances and drive growth.
Being able to understand and evaluate your business through real-time information on actual performance is critical in controlling costs and it could mean the difference between survival and business failure, as Frederic de Ryckman de Betz, director of Attic Self Storage, explains in an interview with smallbusiness.co.za*.
Attic Self Storage – Case study
Our company, which provides self-storage to domestic and business customers, was hit hard by the financial crisis. They say a recession is a good time to start a business, but our business is largely fixed-cost, so adapting to a changing environment is challenging.
With the housing market crash, our fill rate reduced by half, and it was going to take twice as long to break even, with our cash burn rate staying higher for longer. At the same time, just as our funding requirement was clearly increasing, the banks had stopped lending. At the time, we were losing around £35,000 a month.
In our business, we usually offer the first four weeks of storage for free, so our revenue in our first month of trading was something like £250, and we made a loss of £38,000. We were facing a genuine solvency threat before we’d even started.
I was previously in corporate finance so drew on my restructuring skills and just knuckled down. Effective cash flow management was absolutely key. I ran a 13-week rolling cash flow forecast almost continuously for the first two years. It was a receipts and payments cash flow – dead simple, but it played a crucial role in our survival.
To avoid running short, we would move payments around, sometimes by only a day or two – but it kept us within our overdraft limit. The important thing was always to clear debt swiftly so that we could retain those emergency sources of finance for any future short-term gaps.
We also took the decision to sell a significant equity stake in the business to a third party investor. We used this additional equity to leverage some additional debt and, while that didn’t make us comfortable, it did give us just enough breathing space to keep going.
New sources of finance
Although we had the support to make it through the recession, getting the finance to grow the business was a different story. Each phase of expansion was funded through cash generated by the business and debt. When the bank’s support wavered, we turned to crowdfunding and asset finance. Eventually, in 2013, we finally started to break through and generate sufficient free cash flow and the business started to change; we went from thinking about survival to thinking about strategy and growth. We were now at a crossroads: should we remain a small independent, or should we consider further dilution to trigger growth opportunities?
Following the latter route, we have now opened our second store – a ten-minute walk from King’s Cross in central London – and there are several more in the pipeline. With Brexit and political uncertainty globally, there is the possibility of more difficult times ahead. Our business is not recession-proof, but it is now recession-resilient. Having been hardened in the furnace of 2008- 10, we are not complacent.
An iron grip on cash
If the clouds gather, focusing on the fundamentals is critical. Cash is king. Avoid the temptation for over-trading if you’re successful. Control your costs. Make sure you limit what people can spend, and be clear and firm with people when allocating budgets. Review your supply base. If the economy slows down, your suppliers will notice. The business must generate robust KPIs and financials.
Having a good grip on the numbers will give you the information to make the right strategic decisions; and it will give you the time to figure out a plan B, if it looks like you might have a problem down the road.
At Beavis Morgan, we work with our clients to put processes in place which make it easier to run your business and to maintain effective management of your company’s working capital. We also assist with management accounts, enabling better control of your financial situation and awareness of the business in real time, enhancing planning for the peaks and troughs.
If your business requires finance, our partner business BM Structured Finance can help. We match the most suitable products to each individual circumstance and work together to ensure compatibility and satisfaction, thereby enhancing the business’ cash flow liquidity and facilitating maximum growth.
To find out more about how we can assist you and your SME business, contact Steve Govey.
* smallbusiness.co.za: The essential guide to managing small business cash flow