Getting to grips with the financial side of running a small business can feel daunting.
The Help to Grow: Management Essentials Course contains an introduction to the key financial facts you need to know, with topics ranging from cash flow forecasting to where to get funding.
In the first of a regular series, where we ask industry experts to share their knowledge and help expand upon the learnings in the course, we spoke to Nick Howe, Enterprise Partnership Manager for NatWest, who gave us his thoughts on the financial metrics every small business owner should be keeping an eye on.
Finance is often the thing that trips new businesses up -with nearly 40% failing within the first three years due to a lack of cash[1]. How can business owners feel confident in this area, even if numbers don’t come naturally to them?
For many business owners, the numbers are their least favourite part of the job. They’re passionate about their products and services, but don’t necessarily have the same motivation for finances. The most fundamental thing is to create a standard template to ensure the founder understands the picture it shows for their business and what actions they might need to take as a result.
One thing we suggest is to create a template with projected figures for each month and then update them at the end of the month with actuals. The British Business Bank has a very intuitive template which is a great starting point.
What are the key metrics new business owners should be looking at?
Working capital: There can be a great emphasis on capital investment, but working capital is just as important – that’s how you’re bridging the gap between when money comes in and when it goes back out. It can change daily but it’s running out of working capital that trips businesses up more often than running out of capital investment.
Sales: Most businesses track total sales, but it’s vital to know where they come from. Are you reliant on one major customer, creating risk if that relationship changes? It’s also helpful to understand how customers discovered you—knowing what drives purchases is powerful information.
Costs: In the last three years, inflation has been a major challenge for every business, so keeping check on how much you're paying for ingredients or wholesale is vital. It’s also important to make sure you’re not holding on to excess stock and to consider whether to pass price rises on to customers.
Lastly, think about all the other costs and whether they’re staying within your budget. It can be easy to lose track of things, so it’s important to monitor whether costs are in line with what’s expected.
Help to Grow Management Essentials contains a section around funding options for small businesses. With so much choice available, how can people work out what’s best for them, and what's the best way to determine how much to borrow?
With so many options out there, it can feel overwhelming. Doing a bit of research around the different sources available is a good first port of call.
I think it’s also about challenging yourself and asking ‘if I borrow money and spend it on this particular thing am I sure I'm going to get the result?’. For example, if you’re thinking of borrowing £10,000 for a marketing campaign, first identify which channels are most likely to deliver results and test before you commit.
Start small, measure the impact, and only scale up when the data proves it works.
With so many options out there, it can feel overwhelming. Doing a bit of research around the different sources available is a good first port of call.
Late payments can be a tricky issue for new businesses trying to manage their cash flow. What actions can people take if they are not being paid when they should?
It starts off with being absolutely clear on what terms you’ve signed up to.
The Small Business Commissioner, Emma Jones, has lots of information on her website and you can track companies that have signed up to fair payment codes.
When a payment is late you have the right to charge interest on that invoice, but the practicality of implementing that can be a challenge for businesses because, ultimately, if people are a couple of days late it’s not usually the end of the world and you usually want to maintain relationships if you want to do more business with them.
An interesting way I've seen people overcome the issue is by providing a reward for payment on time, or even before time. I'm not saying that everyone should do this, but it can be a good option for some. So, say the invoice amount is £240 but if you pay by x date, we’ll reduce it to £200.
As someone who’s worked with hundreds of small businesses during your career with NatWest, what would your key bits of advice be for those starting out?
A founder once told me, “Fall in love with your customers’ problem, not your solution to it.”
When people have a dream or an idea for a business, they’re usually going into an area they’re passionate about. In my opinion, you need that passion – it’s vital. But, when it comes to the final picture of what your business looks like, don't be led by what your dream was on day one. Let that be influenced by the feedback, by the research, by customer preferences.
Stay within the field you're passionate about but, ultimately, let the customers dictate how, when and where they want that particular problem to be addressed.
The other thing I would say is always make time to work on your business, not just in it.
Promise yourself that, as regularly as you can, you will take a step back to work on the business. Have your supplier costs changed? Have your customers’ trends and tastes changed? Have your competitors changed?...
I'd aim for at least once a month.
Fall in love with your customers’ problem, not your solution to it.
What support does NatWest offer for small businesses?
Earlier this year we launched our Accelerator app, that anyone can download for free. It contains loads of support in all different areas, so people can pick and choose the bits that feel right for them.
Firstly, there’s access to learning, focused around three key pillars that businesses have told us they want support with – funding, sales and leadership skills.
Secondly, by joining the app you become part of the Accelerator community, giving you the opportunity to meet and network with other business owners. Running your own business can be quite isolating sometimes so this can be a real benefit.
We also have a separate partnership with a great charity called Digital Boost who match business owners and community-led organisations to experts at the time and place when they need it. There are currently over 5,000 individuals on the platform, with myriad different skills. Business owners can book a free 60-minute session to talk about problems they might have and come up with an action plan.
For more information about the free NatWest Accelerator app click here.
The Help to Grow: Management Essentials Course is a free, online course backed by some of the UK’s leading business schools. It provides a great introduction to finance for new businesses, including modules on the financial data you need to capture, and the various source of funding. There’s also information about growth planning, marketing and sources of support for new business owners, as well as real-life stories from businesses like GymShark, Mackies and Ooni.
You can sign up to the course here.
