In the majority of domestic and global economies across the world, small to medium-sized enterprises (commonly known as SMEs) are the bedrock. They provide the foundational backbone upon which the many other organisations can subsequently stabilise and thrive.


SMEs contribute significantly towards providing work to the masses, meaning they directly influence the lives of individuals and their families too. From an economic standpoint, these small companies combine forces to bolster their respective countries, and the world, to massive cumulative effect.


Despite this, SMEs are often faced with complex accounting conundrums that perhaps larger-scale businesses would be able to overcome through sheer financial brute force. Either that, or the large companies and PLCs would more readily have access to the necessary expertise in the form of dedicated internal departments or consultants.


Whilst we cannot hope to cover them all (the list of challenges is almost endless given the varying business types, management structures, industries, employee headcount etc.), this article identifies the 3 most common accounting challenges that a small business will face on a regular basis, no matter their individual traits.


Once each challenge is identified, we'll offer respective solutions for each, designed to provoke practical thought and debate in the minds of leaders in SMEs based here in the UK and further afield.



Challenge #1: Cash Flow

The issue of ‘cash flow' may sound generic in isolation, but for small to medium-sized enterprises, it presents itself in a couple of profound forms.


You will have heard the expression “cash is king” many a time, and this sentiment couldn't be truer in the context of financial sustainability for SMEs. Quite literally, small businesses are presented with the daily challenge of simply having enough money in the bank to get by from both a survival standpoint, but also that of reinvestment, innovation and development of internal systems and product/service offerings. This can increase their reliance on and exposure to external factors (when compared with a larger, cash-rich organisation) such as market fluctuations, buyer confidence, competition, economic conditions, unexpected bills – the list goes on.


Secondly, and separately from the above, a large proportion of SMEs invariably have a hard time adequately managing their cash flow. For example, basic insight such as “What does the next 6 weeks look like for my business profitability? What about the next 6 months?” can prove elusive.


When faced with a more detailed, yet extremely common query, such as:


 “We're planning to expand to a team of 10 members of staff within the next 12 months, what percentage increase in recurring monthly revenue do we need to hit, so we can invest in this area?” – it becomes impossible to answer.


These are common questions asked every day by owner-managed firms and SMEs. They are impossible to answer without the required skills and expertise.


Further – due to the nature of small businesses, there are often little-to-no budget in place for ongoing purchases, both large and small. Over time, a smaller firm with restricted margin for error can very quickly spiral out of control in terms of spending and long-term outgoing commitments. If you then throw in another circumstantial cash flow variable such as poor management of credit control, you're fast on the way to a problem.



Thankfully, there are some simple measures that SMEs can use to their advantage where the management of cash within the business is concerned. The following will alleviate all challenges outlined above, whilst also creating a springboard for opportunity and enhanced decision making in the future:


  • Cash flow forecasting: Detailed (and conservative) cash flow forecasts can help decision makers within the business understand it's overall liquidity position over the short and longer term too, especially when revenue prospecting is reliable. For SMEs, this is best carried out with the help of an accountant for proper judgement, structuring, accuracy and data extraction.


  • Expenses refinement: Create a budget for ongoing expenses and then closely monitor weekly and monthly fluctuations. This will quickly highlight areas that are exceeding agreed levels, meaning action can be taken to reduce unnecessary spending. With this safeguarding method in place, the business is no longer at the mercy of unexpected, spiralling outgoings and can begin to build a strong financial foundation for the future.


  • Receivables and payables: Optimising your accounts function takes most of the guesswork out of cash forecasting in small businesses. With standardised procedures in place for paying outgoings and receiving payments from customers, you can minimise timing fluctuations, which subsequently allows for greater accuracy in financial forecasts and planning. This is critical, as it promotes informed decision making – an elusive yet vital tool in the arsenal of the small business owner.



Challenge #2: Maintenance of Financial Records

Whether faced by a lack of general accounting expertise, poor software infrastructure or (very frequently) inadequate time due to the daily demands of running a small business – many SMEs struggle with maintaining accounting records. Let alone records of any accuracy or value.


The irony here is that small businesses have greater short-term financial exposure than a larger equivalent, meaning financial records are of equal or greater importance in the immediate term. The fact that it's commonplace for the maintenance of these records to be placed on the backburner by management, in favour of prioritising the many other daily tasks, is quite the opportunity cost.


Poor standards in the upkeep of financial records can easily result in discrepancies and data entry errors. Not only does this have an impact in the short-term in that its impossible for such a business to track its own progress across all operational departments, but it also prevents the accuracy of data and therefore the ability to make informed financial decisions too.


As a very real consequence of this, SMEs can often find themselves in the unenviable position of producing invalid or error strewn financial statements and tax filings – an outcome that is entirely avoidable.



With avoidable problems such as the above, you'll often find that simple solutions are not far behind. The key here is to stem the flow of adverse knock-on effects originating from neglecting the upkeep of financial records in small businesses. How is that possible, when the typical director of a small business is pulled from pillar to post each day?


  • Outsourcing or delegation: Like any other specialist business function, especially where there is a shortage of time and expertise to consider, accounting is always best placed in the hands of a professional (in-house or external). You'll remain on top of your compliance and legal obligations, whilst also benefiting from the critical boost of harnessing accurate data, from which excellent decisions can be made. A high-value investment indeed.


  • Invest in a systems upgrade: There are many options available now for compliant accounting software, boasting super user-friendly interfaces and cutting-edge automation to double down on efficiency and reduce human error. Overall, they present an indisputably advanced offering compared with their dated equivalents and can provide the catalyst required for owner-managed businesses to remain ahead of the ‘record maintenance' curve.  



Challenge #3: Compliance

Remaining compliant within the UK small business landscape is tough. Whether via a company, partnership or self-employed, it requires ready access to, and an expert understanding of regulatory information. If a small business owner does happen to have access to all the information, they must also understand technical wording and the necessary practical application. Further, these laws change frequently. These barriers combine to create a minefield for the decision makers within SMEs, especially those with no expertise, motivation or time to transform their own knowledge on the subject.


The result of failing to comply with the many rules and regulations can be catastrophic for small businesses, not only in a legal sense but also the reputation of the business can suffer, meaning long-term impact on future opportunity and buyer confidence. Further, unexpected penalties and associated interest can be incurred for non-compliance, a devastating disruptor of cash flow.



Conveniently, becoming and remaining compliant has an associated relationship with our second challenge within this article. Those firms that stay well on top of maintaining their financial records are highly likely to also be compliant with the ever-changing rules and regulations – they almost represent cause and effect. Almost.


  • Consult with experts: In the same way you may choose to outsource the maintenance of your financial records, or your digital marketing to industry leading experts for example – we recommend you should also delegate your compliance procedures. A tax specialist accountant can ensure that your business remains compliant from a legal perspective. This is incredibly important and impactful for the small business owner. A good accountant can also fulfil the role of trusted advisor on all manner of tax efficiencies and ongoing advice.


  • Self-education: If you are a director of a limited company in the UK, you are required to maintain your own knowledge of your company's compliance obligations. Whilst you're at it, why not bolster that knowledge further by subscribing to industry newsletters or attending workshops? By investing your time in this area, you're satisfying your directorship obligations, whilst simultaneously positioning yourself to obtain more value from your accountant through improved questioning and higher-level discussion. A win-win.



Closing Thoughts

As we've explored in this article, the 3 most common accounting challenges faced by small businesses are swiftly resolved with the right technology in the hands of quality technical expertise. When you combine these factors with the proper standards of care and attention, you can build a robust foundation from which your business can excel.


High quality accounting is critical to the success of our SMEs – this applies not only here in the UK, but the world over.