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According to new research conducted by ReadSoft, high turnover small businesses fail to meet ‘best of breed’ financial practice, with poor cash management and inefficient processes, opening them to vulnerabilities and risk of bankruptcy. Negative average capital expenditure and financial investment (-£117,000) amongst top performing small businesses only worsens the situation.

Simon Shorthose
Simon Shorthose

Based on 2012 data from Bureau Van Dijk, the research assessed the 200 top performing small enterprises with 50 employees or less in the UK ranked by turnover of less than £6.5m. These were also compared with 400 medium and large businesses with the highest recorded turnover for the year.

When gearing ratios were compared, small enterprises presented the widest possible fluctuations in results indicating vulnerabilities in a downturn. This included the worst gearing ratio of all 600 businesses investigated, with small insurance companies proving to be the most risky of prospects.

However, small businesses did report the best liquidity ratios, meaning they are more capable of paying off their obligations. Within smaller enterprise, education, healthcare and finance were in best financial health on this basis, but the travel sector, followed by manufacturing were less flexible.

The liquidity of an organisation to pay its short term obligations in time depends upon the quality of its trade debtors, and there was a learning curve from small to medium enterprise when debtor turnover was assessed. Across small enterprise, education leads travel and healthcare in terms of efficient management of debtors. Wholesale and insurance demonstrated the lowest debtor turnover and by implication poorest management of debtors. The lowest individual ratio, at 0.16, was logged by a finance company, with the second at 0.17, an insurance company.

Small businesses also struggle with Days Payable Outstanding (DPO). 60% of top performing small enterprises demonstrated poor management with DPO of less than 30 days, indicating some work still needs to be done to improve processes.

Debtor Collection Days (DCD) rates were also poorest amongst smaller businesses where higher figures suggest inefficiency and potential bad debts. Cash businesses, such as retailers were, as expected, the best performing as they receive money at the same time as selling goods. Small insurance companies were by far the worst performing averaging more than 283 DCDs.

Simon Shorthose, Managing Director, ReadSoft UK says: “When you see high turnover, you expect this to reflect strong business sense and tight financial control. What is clear from assessing these high performers is that this is far from the case. These companies are juggling cash and credit, and short term business development is far from secure. Organisations, even those, that at face value, appear to be doing well need to get better control of their finances, fast.”

Automation of the Account Payable and Accounts Receivable functions can rapidly address the many intensive manual processes which affect businesses in the UK.  No matter the scale, ReadSoft enables organisations to adopt finance process automation with a range of cloud based, on-premise and large scale solutions, helping to reduce costs, increase control, and achieve business stability. Smaller organisations can deploy the latest developments in automation through Cloud based invoice and document processing. ReadSoft Online provides a simple, no cost to set up, fully scalable OPEX based alternative for small enterprises that wish to drive efficiency despite the reductions seen in capex spend.

ReadSoft offers a free accounts payable automation ROI calculator which can show much a small business could save through efficiencies delivered via automation.

2012 findings averaged across the UK’s top 200 performing (by turnover) small enterprises