Small businesses are the foundations for every economy - but they are also the most precarious of enterprises. And it all boils down to money.
A great service, an iron will, and great customer loyalty are not enough to keep things moving if there’s a cash flow problem. This major issue is what determines whether an SME is on the brink of success, ready to scale or nearly bust.
Getting cash flow positive doesn’t happen overnight. Any investment made in products or workers takes time to transform into liquidity. Unfortunately - that’s one thing most SMEs simply don’t have - time to wait for payment.
Add to the mix the need to also pay for employee wages and other overhead costs and suddenly an SME without a decent cash flow runway is borrowing money to cover costs at high interest rates, which hinders the ultimate goal for any business – maximum profitability.
On average, SMEs have a 30-day cash reserve to cover cash flow problems. If payment takes 60 days or more, businesses can start to falter because they need twice the amount of reserves to cover costs and the next round of inventory - whether it’s physical or professional services. The slower the cash-to-cash cycle the more expensive it gets to run a business.
The culture of late payment is getting worse for SMEs and undermining the stability of economies. According to research conducted by MarketInvoice, over 60% of invoices issued by UK SMEs in 2017 – worth over 21 billion- were paid late – up 62% from the previous year.
An economy can’t thrive if SMEs cannot resolve this critical issue – they are worth too much to national growth and to the cohesiveness of communities. In the UK, SMEs account for 47% of all private sector turnover - a sum too big to ignore.
So, what are some of the ways to avoid such a scenario?
Do SMEs have any power over the speed in which they manage cash flow? Or is the act of chasing invoices part and parcel of what it means to run a small business?
While there’s no panacea to cure the late payment scourge, there are several ways to help minimize the cash-to-cash cycle without having to borrow finance or call in the lawyers.
- Don’t tolerate late payments
Extending terms to your customers to delay payment will give them permission to make late payments – a something you need to avoid from the very start of a client relationship. Offering discounts for early payments can also work well, and incorporating a late payment policy can dissuade payment delays.
2. Itemise and split invoice fees to encourage faster payment
Billing for fees or expenses can bloat a final invoice – so why wait until the very end to settle the total if the service has already been delivered? Itemise and bill separately for spending you’ve made for your client to complete the job the moment it’s done. This gives the client enough time to review and go through the charges- and enough time for you to resolve any disputes that can delay reimbursement.
3. Optimise supply and demand performance
Keep track of the demand of your inventory – don’t order too much or too little – and work closely with marketing teams to know when promotions and new campaigns will launch and potentially spike interest in your goods or services. This can help you prepare for demand and get the right amount of stock in place ahead of time. Planning and forecasting schedules for sales and operation planning goes a long way to managing cash-flow cycles. You would also be wise to consider investment in customer relationship platforms that keep track of their spending habits and preferences – as well as the performance of your competitors.
4. Trim overheads
Lean companies have the agility to deliver goods quickly and to achieve faster turnaround for payment. Take control of your end-to-end processes, and fill any gaping holes that are making it more expensive to run your operations and partner with any suppliers to integrate process and enhance your performance. Running a tight ship is important – but keep an eye on stock calculations to guard against your customer service and company brand.
5. Optimise order-to-cash process
Examine every step of the invoice process, and eliminate anything that is slowing down the payment cycle. Investing in digital invoicing, financing and payment platforms are other good ways to reduce time in order-to-cash processes as well.
The persistent and growing trend in late payments remains a critical issue for most SMEs, so preparing for the likelihood of slow cash-to-cash cycles is important – not only for the small businesses but for the overall economy as well, which relies on the billions that small companies generate each year to fuel its growth and prosperity.
6. Manage cash effectively
When holding cash, ensure that it is always deposited in accounts that will create the optimal returns for your cash flow circumstances. Managed porting of your cash holdings will leave you with cash available when you need it, but also generate returns from an asset that otherwise wouldn’t be working for you. For more information on how to manage cash portability effectively, contact Akoni.