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Financial planning
We give you practical advice on how your SME can obtain financial leeway. We also explain how you can minimize risks and achieve optimal liquidity management.
Financial flexibility can cushion difficult economic periods or form the basis for future investments.
If SMEs want to stock up on financial resources, there are various options that provide more flexibility in the short or long term. Short-term funds enable business operations to be maintained rapidly, but are rarely sustainable. Long-term funds, on the other hand, stabilize the growth and future viability of SMEs. However, they require more planning, higher investments and are often associated with risk. Which instruments are useful and when depends on each individual company. The most common are listed below:
Financial flexibility and security can only be achieved if SMEs take important steps to gain an overview of their finances and use their resources strategically. A detailed overview of the current situation should be available at all times so that forecasts can be made and steps taken to ensure that financial flexibility is considered holistically.
As well as using the right financing models, companies can achieve financial flexibility by means of comprehensive strategic work. Companies should plan and monitor their cash flow on an ongoing basis. To do so, they should prepare a cash flow statement, carry out liquidity planning and draw up expected forecasts, as well as optimizing their receivables management. Only a positive cash flow leads to financial stability and flexibility.
The aim of every company is to have sufficient liquidity reserves available at all times. Ideally, they should be high enough to bridge several months. This can be ensured by taking advantage of credit limits or other forms of financing, as well as via professional receivables management. The active management of payment terms and an automated dunning system are the simplest means of collecting receivables.
To find out how financially flexible a company really is, various scenarios can also be tested – for example a 20% drop in sales or a 30-day delay in payment. By simulating these burdens on cash flow and adjusting the company’s liquidity plans accordingly, it quickly becomes clear what measures can be taken in an emergency. Forward-looking planning enables companies to act more quickly when real bottlenecks occur.
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In-depth financial planning and analysis of the financial structure also result in greater flexibility for SMEs in the long term. To ensure this, budgeting and forecasting are essential. All expected income and expenses are planned in detail so that regular forecasts can be made of the predicted financial development. In order to be financially flexible, it is worth using a rolling forecast, for example by checking the balance sheet, cash flow and income statement quarterly instead of annually. This allows bottlenecks to be identified more quickly so that appropriate measures can be taken.
Important key figures should also be monitored regularly. Aspects such as profitability (EBIT/ROI), meaningful liquidity ratios (cash ratio, quick ratio), the debt ratio (debt/equity) and many other figures can be evaluated.
Once these analyses have been completed, SMEs should review their investment decisions. Various methods are available for doing this, such as the income approach, the net asset value method or the discounted cash flow method. They all determine the value of the company and provide information on which decisions need to be reconsidered and modified.
Government regulations on investment control must also be regularly reviewed and complied with. Strategic financial targets linked to the business strategy can then be derived from this planning and analysis.
Legal pitfalls and ignorance of them can soon cause financial security to be jeopardized. SMEs should know which legal framework conditions currently apply and how the situation could change if, for example, the company structure is modified.
These important factors should always be kept in mind:
A detailed risk assessment and the management of potential risk factors create transparency and increase the ability of SMEs to act. Establishing a risk profile and testing possible stress scenarios also strengthen the company’s resilience, which leads to greater financial flexibility. The focus for SMEs should be on identifying, quantifying and prioritizing potential market, credit or liquidity risks.
To avoid risks, insurance policies such as business liability, business interruption or accounts receivable insurance should also be checked and taken out or renewed if necessary.
Based on these measures, SMEs should develop a crisis communication strategy to take effect in the event of financial bottlenecks. This can be strategically prepared in advance and should address challenges as openly as possible throughout the company in order to involve all stakeholders. Responsibilities should be clarified and there should be motivation to act with determination in emergency situations. Entrepreneurial financial knowledge and thinking can also be promoted across all areas in order to avoid bottlenecks and strengthen financial flexibility throughout the company.
A somewhat unusual method of ensuring financial flexibility is to participate in industry networks and enter into partnerships. This creates synergies that facilitate access to best cases and build up further knowledge. Cooperation with financial institutions also provides early banking contacts and an insight into the wide range of advisory services available for SMEs.
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SMEs should constantly work on being financially flexible. This gives them the freedom to cushion economically difficult periods or to invest in innovations.
Ideally, SMEs should follow several paths in order to remain financially flexible. It is always advisable to ensure a mixture of appropriate forms of financing, to review the company’s financial situation and to adopt non-standard approaches.
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