-The simple 50/30/20 rule applies in home economics. It is a management method that distributes income into three categories: 50% for rent, mortgage, bills, transportation; 30% for dining out, shopping and entertainment; and the remaining 20% to recover or pay off debts. Is there an equivalent for SMEs? What would your advice be?
For proper SME financial management, it is essential not only to generate revenue that exceeds costs, but also to collect that revenue within appropriate timeframes so the business can meet its largest upcoming obligations. It is logical that the selling prices of goods or services cover the cost of production and leave a profit; this is the core objective of any commercial or for-profit company. Equally important is robust management of collections and cash flow. Monthly payments to suppliers, staff, and other expenses must be timely, avoiding liquidity gaps that could stall operations. A practical, short-term liquidity forecast helps ensure the company never runs out of cash to cover operating expenses, preserving the continuity of its operating cycle.
-It is talked about creating a cushion against unforeseen events and unexpected expenses. But how much does it need to be?
Determining the exact cash cushion for any given date can be challenging, especially when unplanned expenses arise. The approach recommended above—adequate short-term collection and payment planning—helps identify which liquidity sources are available to address unplanned costs. A minimum reserve, invested in readily accessible short-term instruments, can help safeguard profitability as much as possible. In practice, maintaining a liquidity pool equivalent to roughly 20% of annual expenditures in liquid form is a prudent rule of thumb for many small and medium enterprises in North America, though the precise figure depends on industry cycles and risk tolerance.
-Do you recommend relying on bank loans? What would be the most suitable interest rates?
External financing is a common reality for many SMEs. While a business should ideally fund operations from its own earnings, there are times when debt is necessary to finance fixed investments—such as machinery, transportation assets, or intellectual property. When external financing is used, two key considerations matter: the repayment period in alignment with asset recovery and the overall cost of debt. With rising interest rates, choosing between fixed and variable rate loans becomes critical. If a stable fixed rate can be secured, it often reduces interest rate risk and improves long-term cash flow planning. In markets like Canada and the United States, lenders typically offer a mix of term loans, lines of credit, and asset-backed financing; the best option hinges on the business’s cash flow profile and risk tolerance, not merely on the stated rate.
-How should we act in case of financial assets acquired by our company for investment purposes? (I mean having stocks, bonds, notes, etc. and still having them at the end of the year).
When a company holds financial assets for investment, it should assess both return and risk. Low-risk holdings, such as government or highly rated debt, tend to offer modest returns but preserve capital. Since these investments are typically secondary to the core business, they should not be allowed to overtake the primary objective of generating operating profit. If a company has external financing at a cost, it may be wise to consider liquidating investments to reduce debt when the investment return fails to cover the borrowing cost. For instance, if debt costs 4% per year, and an investment yields less than that, using the proceeds to repay debt can improve overall profitability. In practice, the decision should hinge on the relative returns, risk posture, and the timing of asset liquidation versus debt amortization, with local tax implications in Canada or the United States in mind as well. This balance helps ensure that portfolio decisions support, rather than undermine, the firm’s financial health and strategic aims. See generally Market Finance Guidelines (citation) for reference.