STORY INLINE POST
With the holidays upon us, small and medium-sized enterprises (SMEs) across Mexico still have a few matters to address before joining the celebrations. Many are still working on final adjustments and scrambling to meet business and tax payments. Inflation hit 8.70 percent in August, the highest recorded since December 2000.
SMEs are the foundation of a country’s economy and growth. Data from the Mexican Senate shows SMEs account for 95 percent of companies in Mexico. Meanwhile, the National Institute of Statistics and Geography counts 4.9 million SMEs in the country. How can SMEs survive inflation, ace their accounting and tax closing and set new goals to accelerate growth?
Annual accounting and tax closing is a defining stage of the business cycle. It is the time when companies finish their financial statements and pay their taxes, for which they need to conduct a detailed analysis of profits and losses. This allows CEOs to assess their company’s performance and, based on reliable data, envision new goals and targets for the upcoming year.
Year-Round Financial Health
Although many companies’ accounting and tax closing is done in December, the fiscal year does not always coincide with the calendar year. No matter when taxes are due, there is one key factor that SMEs must always keep in mind: their financial health. Good health is a basic need for any person or organization — it is a necessary condition for growth.
Good financial health refers to the financial well-being that a company can achieve through effective financial management. Following good financial practices enables companies to grow despite inflation and navigate the usual obstacles and setbacks of the corporate world. But what does the path to good financial health look like?
The first step to achieving stability is self-diagnosis. As we do with ourselves, CEOs and entrepreneurs must regularly check in with their companies to assess their financial well-being. To guide this self-assessment, companies can ask the following questions: What is our liquidity? Is the company solvent and in good financial standing? Is the company efficient and profitable?
These are vital issues. Companies need to clearly understand their liquidity, which includes their cash reserves and all the assets that can be converted into cash to meet payments and other short-term obligations. This shows how solvent a company is and how easily it can weather unforeseen circumstances at any time.
Another step toward stability is optimizing operational efficiency — that is, achieving the same results with fewer resources. In this respect, companies can focus on improving their daily operations, leveraging technology to optimize processes and other tasks to boost efficiency.
The third step is measuring profitability. After all, a profitable company can grow faster and better. A key indicator to measure profitability is net margin. Net margin looks at the ratio of profit to revenue — in other words, how much net profit is generated as a percentage of revenue. A more significant net margin leads to a greater margin of financial safety. This means a company is better positioned to invest its capital and grow.
To tread this path, companies need end-to-end visibility of their operations and cash flow at all times. Visibility is critical to understanding the actual standing of a company. It is the CEO’s main resource to make smart and informed decisions to resolve issues at the right time and accelerate company growth.
Embracing Technology to Enable Growth
Digital technology and innovation play a significant role in SMEs’ financial health. Not long ago, dedicated solutions like a CRM system were available only to big corporations. Today, the democratization of technology means more companies can embrace innovation to scale operations.
As we mentioned earlier, understanding liquidity is key for any business, and to do so, CEOs must look into accounts receivable. Nowadays, they can leverage online digital solutions to have end-to-end cash flow visibility, record outstanding invoices, create reports in line with the company’s collection policies, and automate critical client reminders. Access to income and expenditure information at all times enables better business planning.
And this is just one example. Technology has transformed every link in the value chain, and it has also triggered a cultural transformation: digitization has passed the point of no return. It is safe to say that in a few years every company will also be a technology company, no matter their main vertical.
To achieve financial health and successful accounting and tax closing, companies need to focus on self-diagnosis, operational efficiency and profitability and embrace technology and innovation. The ever-evolving digital transformation prompts companies to continually search for new solutions to increasingly optimize their value chain. This can enable growth and, most importantly, help advance economic development across the country.