The UK’s decision to exit the European Union is causing market instability and while much of the focus has been on the valuation of ASX200 companies, SMEs are on the frontline during this volatile period.
SMEs are considerably more likely to have direct exposure to lending conditions, greater dependency on a handful of key clients and, given their smaller size, are much more susceptible to changes in market sentiment.
Given the significant increase in volatility, SME owners need to ask themselves: how am I affected by the lack of market confidence and what can I do to protect myself?
For Australian SMES, short-term consequences include additional uncertainty around proposed business reforms and tax cuts, as well as lower business and consumer confidence.
In the longer term, we may witness an extended period of global uncertainty, with the UK Treasury predicting recession following a successful vote for the UK to leave the European Union.
In short, much of the current uncertainty has been driven by political action, which is difficult to control – especially for SMEs. The best advice I can give is to evoke the old adage of not worrying about things you can’t control and focus on the things you can.
While this is easier said than done, there are a few tips which can be implemented which will ensure your businesses finances remain in order and you are able to take advantage of opportunities at your disposal.
Consider FX and hedging options
For SMEs that export internationally, especially to the UK, speak to your trading partners and assess what impact Brexit and other political risks are expected to have.
If possible, review ways of reducing or avoiding trade while faced with unfavourable currency rates. If you have a long-term export contact in place, currency hedging can be more effective method to mitigate volatility and provide certainty.
If you’re an Australian-based importer of products you might find your money going further, enabling you to buy more product or the same for fewer Australian dollars. Cash flow permitting, you may be able to fast track purchases to lock in benefits of a higher AUD.
Remember, the instant asset write-off remains in place and could be applicable. SMEs can use this deduction for each asset that costs less than $20,000 whether new or second-hand.
Collect invoices in a timely manner
Be sure to follow up invoices that are overdue, especially during a period of weaker demand.
If possible, give digital payment options to your customers so they can pay invoices instantly, this means better cash flow for your business.
If customers are not paying you in a timely manner, you can review your bad debt and write it off, as this may provide your business with a tax deductible expense. Another option is to sell your accounts receivable to a third party at a discount to meet immediate cash needs, this is called invoice factoring.
Manage your business finances
It is important for businesses to follow regular procedures and stay on top of business finances. Remember to check cash flow on a weekly basis and monitor any potential issues such as upcoming tax, GST or superannuation payments.
Businesses should review performance against forecasts on a monthly basis and make adjustments where necessary, such as providing discounts for early payment or negotiating longer terms with suppliers if cash flow is tight.
While conditions at the moment are relatively uncertain, it is important to remember the market is cyclical and there will always be periods of heightened risk. It is the maintenance of good practice and savvy business decisions which will assist your business in good times and bad.
About the author
Sam Allert is the Managing Director of accounting software company Reckon.
Note: This article is of a general nature only and should not be relied upon for your specific circumstances. Reckon does not provide tax or legal advice. Businesses should consult with a professional adviser, tax expert or lawyer before acting.