IRIS Elements: Five financial management predictions for small businesses (SMEs)

While 2024 may be a brand new year, the baggage from previous years will, without doubt, play a pivotal role in shaping how small businesses (SMEs) handle financial management.

The ongoing economic uncertainty presents plenty of ground for predictions.

We’ve consulted our top minds and compiled what we think will be the five biggest 2024 trends in financial management for small businesses.

1) Cash will remain king

We will see a further knock-on impact from the cost-of-living crisis, across small businesses in particular, with insolvencies increasing.

UK business closures have already overtaken openings as high borrowing costs bite, and there’s no indication that interest rates will ease either.

As a result, careful cash flow management will be increasingly important.

What can business owners do?

Be strict with your payment terms.

Review the payment terms you have and look to shorten them. Gone are the days of waiting 30-60 days while your invoices are processed.

Ensure terms and conditions (T&Cs) are clearly set out in your standard proposals or letters of engagement.

Most importantly, ensure your payment terms to suppliers either match or exceed payment terms for customers so you don’t end up out of pocket.

Additionally, you can reduce friction on your payment journey by offering multiple ways to pay.

For example, including a “pay now” button on your invoices can help significantly speed up payments.  

Automating your credit control also gives you an automatic debt recovery procedure, helping take the pain out of chasing invoices and making cash flow more available.

2) Fatigue is preventing growth

Many businesses now enter 2024 somewhat fatigued.

We are facing stealth increases in energy rates, with prices still much higher than before the energy crisis.

There’s also no relief on business rates either, unless you are in hospitality or retail.

Even with some additional initiatives from the Government announced in the Autumn Statement, most SMEs will have already gone into their reserves and implemented the obvious cost-cutting shortcuts available to them.

What can business owners do?

Develop a strategic plan with a complete view of your financial position.

If you’ve ever watched a five-minute video about the key to a successful business strategy and were left with more questions than answers, you’re not alone.

Many small businesses don’t have a strategic plan.

Well, it’s time to create a plan, with actions and goals which outline how you’ll compete in your market and with what products/services.

Articulate what you want to achieve.

For example, are you looking to grow revenue, increase market share, expand into new regions, open more stores or hire more people?

Next is how you are going to do it.

Perhaps engage your accountant for a financial performance review first.

Accountants are great at helping you squeeze more out of your margins and propose what you could potentially dial up to support growth.

An external sounding board is often extremely helpful for moving the needle in the right direction.

3) Salary costs will push SMEs to review labour strategies

Financial uncertainty and wage inflation continue to place strain on businesses’ labour budgets and compensation packages – an issue compounded by National Living Wage increases that cause upward pressure throughout the workforce.

Employers will seek innovative and novel ways to add resource to their business in the areas that matter.

In 2024, outsourcing services will continue to lose their stigma as companies look for cheaper ways to deliver business-critical activities, such as payroll, HR and IT.

What can business owners do?

Explore the outsourcing options available to you as a way of reducing administration time and enabling your team to add more strategic value.

Outsourcing can be an incredibly useful way to help redeploy your employees into areas of greater value.

By passing over costly, bulky and repetitive tasks to an external provider, your people can instead spend time generating new revenue streams.

Note: be prepared to put the work in up front with outsourcing providers. An external team need clear processes for engaging with you and needs to be trained on your business.

Once you’ve outsourced some of your bulky admin, you can begin to upskill your staff and throw Generative AI into the mix to get even more economies of scale!

4) New mandate of Companies House means business operations must be legit

The new Economic Crime and Corporate Transparency Act (ECCTA) aims to stem the flow of dirty money in the UK.

In 2024, all suspicious activity will be reported to law enforcement and company directors will need to be verified.

Small businesses will now have to file a Profit and Loss to Companies House and AI tools will increasingly be used by HMRC to reduce tax evasion.

This is great news and a just reward for legitimate businesses, but for those cutting corners, it could be very costly.

What can business owners do?

Small businesses must proactively adapt to ensure compliance, maintaining accurate and up-to-date information about business activities and strengthening their Anti-Money Laundering (AML) practices.

Review and update your information on Companies House, ensuring all details, such as ownership, business activities and registered addresses are accurate.

Implement thorough checks on clients, suppliers and other business associates, as well as educate employees on the importance of AML compliance and provide training on recognising/reporting suspicious activities.

You may choose to pay someone to do this on your behalf.

Otherwise, evaluate technology solutions that aid in AML compliance.

Automated tools can streamline customer due diligence, transaction monitoring and reporting processes, helping you stay compliant without significant resource allocation.

One thing is for certain: you don’t want a customer or supplier disappearing due to an investigation before they have delivered a service or paid an outstanding bill.

5) Tax and accounting will go digital

The business landscape is undergoing a transformative shift with the introduction of Making Tax Digital (MTD).

Making Tax Digital mandates businesses to maintain digital bookkeeping records and use compatible software for submitting tax returns.

Aimed at simplifying tax processes and promoting accuracy, MTD requires small businesses to leverage technology for more efficient financial management.

Now is the time to get prepared.

What can business owners do?

Move away from paper-based record-keeping and digitise all financial records, including invoices, receipts and expense reports. 

Start by evaluating your current financial systems to determine their compatibility with MTD requirements.

Embrace cloud-based accounting platforms to facilitate real-time record-keeping and collaboration.

Cloud solutions not only offer accessibility from anywhere with an internet connection but also ensure that your financial data is securely stored and backed up.

Prepare your team for the transition by providing training to familiarise them with the new digital processes.

Should you need additional help, seek guidance from accounting professionals – they can provide valuable insights, help with software selection and ensure your business is fully prepared.

Investing in the right tools

With financial uncertainty running rampant, investing in new technology may seem counterintuitive.

However, the costs associated with good software are often outweighed by the drastic time and resource savings you can achieve.

Of course, be smart, but also bold and brave.

For those considering tech investment, there could be a beacon of shining light.

Following the Chancellor’s recent announcement, with full expensing, UK businesses can expense 25p for every £1 they invest in plant and machinery; the definition of which includes lots of other areas including technology.

Read our recent blog to see how full expensing can help you save on software.