Recent research from Hitachi Capital1 found that nearly half of SME owners have used their personal savings to combat cashflow squeezes and ensure their staff, customers and suppliers get paid.
Late payments were the main culprit, costing UK SMEs an estimated £5 billion in the last 12 months. Hitachi added that 57% of firms spend at least an hour a day chasing outstanding invoices, noting a 22% rise in the number spending time and money on legal action.
Don’t be naïve
Hitachi has also revealed that 48% of UK owners blame themselves for the problem. They regret having a ‘naive attitude to cashflow’ and worry that it has held back business growth. Almost two-thirds said they had overspent before gaining profit, leaving them in greater debt than they could manage.
“If you don’t have cashflow then you don’t have a business,” says Matt Kelly of business advisors Elephant’s Child. “You might land a £100,000 order but fail to have the working capital necessary to fulfil it. You won’t be able to invest in your supply chain or pay your employees or suppliers. You may overtrade and not have the cash to support it.”
Understand the cash pipeline
Matt says owners need to be “ahead of the game” and have a firm grasp of what cash is coming in and out of the business.
“Many owners begin their business as a passion project and don’t fully know how their business models translate to cash and profits,” he says. “They may have made £100,000 per month in the past but they don’t grasp the reality that they now only have the customer base to do £50,000 a month. They keep spending the same overheads and wages and get into cashflow difficulty. They need to regularly look at the business and ask, ‘what is my realistic cashflow pipeline?’ You should never be surprised by your cashflow.”
Mariah Tompkins, owner of WKM Accountancy Service says new businesses are particularly vulnerable. “In the rush to secure a business opportunity you may spend too much cash on the wrong clients and then the order falls through,” she says. “Low profits are another issue as you will not be able to cover the cost of all your business expenses. So, you need to consider whether you are charging enough for your products or need a new income stream.”
She says having too much stock can also cause cashflow woes and therefore needs to be monitored carefully to ensure it is tied up for only the shortest time possible.
“Seasonality, meaning you receive more business some months than others, is another cashflow challenge,” she adds. “SMEs also need to look at cash going out for overheads such as rent and utilities.”
Forecast your cashflow
When it comes to solutions, she agrees with Matt that a cashflow forecast must be created alongside ‘robust’ debt recovery procedures and credit check policies.
Owners, she adds, need to invoice both accurately and promptly as errors could mean a late payment or incorrect amounts ending up in the bank.
“You can have a major challenge if you have committed £100,000 to another supplier or for your pay run and then a customer pays late. It may be because they haven’t received your invoice, or they are unhappy with your goods or service,” Mariah adds. “If you work with overseas suppliers, they may offer unfavourable payment terms such as paying upfront deposits. You need to have full visibility and understand the full cycle of landing a deal, ordering from suppliers, invoicing and the cash ending up in your bank. What could go wrong?”
James Carfell, marketing manager at Surrey-based SME Collier Roofing, says it includes a 15-day payment requirement. “I believe that 30 days should be seen predominantly as a late payment, rather than an acceptable time schedule, if you are to stay on top of your cashflow situation,” he says.
Get upfront payments
Alina Cincan, managing director of Inbox Translation, advocates asking for upfront payment. “There are a few situations where upfront payment, whether partial or full, is justified, such as when you are dealing with a new client whose financials you know nothing about or with a client based in a country where reaching them in case of non-payment might be a bit more difficult,” she says. “There may also be times when you might consider offering a small discount for upfront payment.”
She also urges owners to follow up unpaid invoices. “Accounting software can track when and if payments have come through and send automatic reminders when they haven’t. This takes the awkwardness out of the equation.”
Other options available include invoice financing where owners receive a percentage of the invoice amount upfront from providers with the remainder to follow full payment.
Keep cash reserves
Matt says overdrafts or loans can also help if the owner knows their future cashflow pipeline can repay it. But there are limits.
“When you start putting family money in and getting personal guarantees then problems start. You are putting your own financial future at risk,” he says.
James says having cash reserves can help avoid that temptation: “You can reinvest back in the business when times are good, but make sure to store some of the cash for the harder months,” he says.
1Late payments costing UK SMEs at least £51.5 billion a year, published by Hitachi, Sept 2019
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.