SME

How SMEs build financial resilience

SMEs remain resilient through hard earned relationships that can carry them to success even in today’s uncertain economic climate, explains Jon Green, Lawyer at The Legal Director.

The World Economic Forum’s Global Risk Report 2024 suggests that the short-term outlook for economic conditions will remain highly uncertain, with supply chain disruption likely contributing to economic downturn and a lack of economic opportunity. Whilst failing to perform in line with market expectations during tough economic times can prove very damaging to the reputation and share price of large public corporations, they typically have the capacity to ride out even the worst of storms.  

However, for SMEs, potentially without much balance sheet flexibility or ready access to funding, the future is more uncertain. Their day-to-day success and capacity to mitigate risks to their financial stability is heavily reliant on their ability to pro-actively manage their business, collect the cash and balance their resources.

Jon Green, Lawyer, The Legal Director

The successful management of hard-earned relationships with all its stakeholders must be at the heart of any SME’s strategy to build resilience during difficult times.

Particular issues SMEs should consider in conjunction with their advisers are:

Due Diligence

Onboarding processes for any new customers or suppliers should pay particular attention to the robustness of their business and financial viability.  

Due diligence should be updated and reviewed on a regular basis to give the SME the best opportunity to address any concerns which may be emerging with a particular customer or supplier.

Contract Management

Any new contractual arrangements should seek to mitigate the risks identified in due diligence and preserve maximum flexibility for the SME. Adopting a clear contract approval process may eliminate expensive mistakes. 

SMEs should review their existing contracts to assess the nature and extent of their rights and risks. It is important to look closely at provisions on liability, termination and force majeure, as these may guide the response to any crisis. Having a clear understanding of the contractual exposures will help determine the best options for the SME and any potential approach to renegotiation or exit should the need arise. Relying on the courts should be seen as a last resort generally given the costs, delays and uncertainty of outcome. Any victory may come too late for an SME struggling to stay afloat. 

Depending on their position in any supply chain, seeking to balance terms from customers with those offered to suppliers may be an imperative for any SME, particularly if they are looking to avoid cashflow constraints. Other mitigation strategies may need to include seeking security or payment in advance from customers to limit the bad debt risk or further diversification of the supply chain to avoid reliance on key suppliers under threat of closure. 

The contract review should extend to cover funding arrangements, property and utilities so that potential cost saving opportunities can be identified and actioned through the exercise of break clauses or other termination rights. A simple schedule of key dates for all contracts can help ensure no opportunities to exit or renegotiate are missed.

Employment Rights

Inevitability there can be pressures to improve productivity and reduce people costs if margins are being squeezed and profitability is under threat. Implementing changes to employment practices or undertaking a redundancy programme requires careful planning and SMEs need to fully understand their contractual and statutory responsibilities. Failure to meet those responsibilities may lead to workplace disruption, delays and additional costs. New legislation in 2024 will see an extension of various employee rights, including certain leave entitlements, and SMEs may need to factor such arrangements into their resourcing plans.

Compliance

When there is stress within the business, so the risk of compliance failures increases, including the threat of fraud. Any compliance failure can lead to financial loss, significant fines and business disruption, and it is important that SMEs maintain a culture which drives strict adherence to compliance requirements. To avoid compliance being seen as just a cost burden or business impediment, SMEs need to ensure their policies and processes are fit for purpose and efficient and effective in the context of their business and the risks and opportunities they face. Tough times typically see the emergence of new regulatory demands and it is important that SMEs keep alert to the changing landscape and assess what actions may be required to maintain compliance.  AI may bring new benefits to SMEs, but it is not without risk or increasing regulation.

Intellectual Property

When costs are under scrutiny, SMEs tend to neglect the importance of their intellectual property portfolio. Failure to ensure the appropriate registration and protection of their intellectual property can have material negative impacts for the SME and its competitive position even when economic times improve. Developing a clear intellectual property strategy and maintaining the commitment to implementing this remains fundamental for the future success of most SMEs.  

There are many things which will impact the ability of any SME to navigate through economic uncertainty. Having an agile and flexible approach which can respond, and adapt quickly, to changing needs and demands, will likely be essential to ensure a sustainable business. Working through these five issues, being well informed and staying ahead of the curve will put SMEs in the best position to make good decisions which address short-term risks but do not sacrifice longer term opportunities.

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