Q2 2021

8 | Q2 2021 Managing Overheads in SMEs As a small business owner – or entrepreneur, if you prefer – you will have realised that running a company has a lot of costs to consider; both obvious expenditure as well as hidden outgoings which you may not be fully prepared for. Managing the cashflow of your new business can often be a juggling act as you attempt to navigate your way through income, accounts payable, invoices and, not least, company overheads. Company costs are generally divided between direct costs and overheads of the business. The direct costs are required to create and offer products and services, whilst the overheads are the costs of administration for running the business. While SME overheads often remain consistent, this does not mean that business owners can ignore them; managing your overheads is imperative to keeping you in the black. John Edwards, CEO of The Institute of Financial Accountants (IFA), agrees that overheads are an area which is often overlooked. “Proper management of outgoing costs as an SME owner is vital because overheads directly impact the bottom line,” he explains. “Although they are often time consuming and can get overlooked, those expenses exist no matter what, and your accounting system requires you to keep track of them.” IFA Member, David Fisher, is a finance director and business mentor with decades of experience in the industry. He offers his five top tips to SME owners on how to successfully remain on top of their overheads. Stay in Control “As a rule of thumb, one fifth of your time should be spent on admin, which includes your ABC: accounts, bookkeeping and cash - collection and costs,” David begins. “Invest time in reviewing your overhead contracts and checking bills to ensure that they are in line with contracts.” He reminds us that it is also important to review monthly management accounts and trends, as well as costs relating to all areas of your business, including ongoing contracts, utilities, professional fees, and licences. Structure Staff Costs More often than not, the biggest area of spend is staff costs, but they are also your most valuable asset. David elaborates: “Remuneration levels should be sufficient to attract, train and retain staff. This does not mean extortionately high levels of pay, but remuneration must be monitored, along with benefits which can improve and increase with longevity.” The list of benefits is extensive, but far from exhaustive, and all need to be scrutinised and considered in the context of the business and workforce. For instance, business owners must weigh up a business cost against working conditions, considering the demands, environment and terms of a job that influence the satisfaction of employees. “You could consider linking pay to service levels and/or results, and ensure bonuses are linked to the bottom-line profit, not top-line revenue.” Outsource Expertise Outsourcing the management of certain overheads to third parties, in return for a cut in the savings, can assist with maintaining scrutiny of overheads. David also recommends taking stock of utility bills and checking that you are on the best, most suitable tariff to meet your company’s needs. You should utilise comparison websites to find the best rates or, to save time, make use of the companies that do this for you, such as www.lookaftermybills.com. Strike the Right Balance Finding the right balance to manage overheads is key and David tells us that businesses need to ensure that they do not ‘penny pinch’ so much that it is detrimental to business growth, but at the same time, that they do not overspend either, and eat into their profits. “Do set specific time aside dedicated to the administration of the business,” he adds. “Don’t spend too much time on the administration, overanalysing or wasting time on unworthy diversionary activities.” Cash is King Cash is the life blood of any business and good cash flow management is pivotal as it can prevent a business from failing. Therefore, financial management is imperative. There must be a steady rate of cash in and out of your business in order to be able to obtain growth as well as to operate on a day-to-day basis. “Forecasts are vital to keep a business running efficiently and to help to predict customers’ paying habits and spending patterns,” David comments. “They will also enable you to compare projected spend to actual expenditure in order to anticipate the cash required, as well as project sales revenue on a monthly, quarterly, or annual basis, therefore helping establish the spending pattern.” Cash flow forecasts are also essential for things such as securing bank loans or investment income and for helping to plan expected supplier costs, payroll, capital, loan, tax payments, and so on. “If funding is required, your accountant should be able to help provide the right support to be able to review current cash flow procedures, to identify where to optimise cash flow management, and to make recommendations to ease the cash flow burden. They will also be able to create a cash flow forecast as part of the financial plan, support funding proposals, and present to third parties.” To find a registered, qualified and regulated SME accountant, visit www.ifa.org.uk/find-anaccountant for further information.