There are a number of metrics that small and medium-sized companies use to measure the success and financial wellbeing of the business: sales revenue, net profit margin, sales growth, and so on. But there is one financial aspect of doing business that can literally make or break a company, and it’s one that smaller businesses are particularly vulnerable to: cashflow
Anyone running a small business will understand only too well how late payments from customers or clients can not only be a problem and a burden in the short term; if it gets out of control, it could be the end of your business. If you don’t receive payments when they are due, you have to sink time and effort into chasing what you are owed. A cashflow shortfall might need to be covered by an overdraft or short-term loan, adding further financial burden.
In more extreme circumstances, the impact on cashflow can mean you have difficulty paying your staff or your suppliers, or meeting other financial commitments such as rent, energy bills or even loan repayments. Any number of small businesses have gone bankrupt, not because they aren’t financially viable in and of themselves, but because overdue payments have irrecoverably decimated vital cashflow.
Research by Bacs Payment Schemes Limited earlier this year highlighted the issues that small businesses in the UK are facing due to late payments. While the headline news – that the total amount that UK small businesses are currently owed is just over £14 billion, compared to over £30 billion five years ago – is good, the effect that overdue payments can have on businesses makes for sobering reading.
Bacs reports that the total bill to small businesses in chasing overdue payment comes in at £2.16 billion. Almost 40% of companies spend up to four hours per week chasing outstanding payments, while 12% specifically employ at least one member of staff to chase invoices. Around a third of small businesses experience a delay of at least a month beyond the agreed payment terms, while a fifth are having to wait more than 60 days to receive payment.
The impact of these payment delays on small businesses shouldn’t be underestimated. The Bacs research revealed that 16% of small businesses say they struggle to pay their staff on time, while over a quarter of company directors have reduced their own salaries to compensate for late payments into the business. Almost a third claim that they have been forced to pay suppliers late due to cashflow problems, while a quarter have relied on bank overdrafts to meet commitments.
You don’t have to take much of a step back to see that late payments can have a much wider effect than on just the single business that is owed money. Disrupted cashflow in one business can and does have a knock-on effect up and down the supply chain. And for many businesses, this kind of cashflow disruption can be fatal. According to Bacs, almost a fifth of small businesses affected by late payments say that a total outstanding amount of between £20,000 and £50,000 would result in bankruptcy; 7% said that they are already approaching that limit.
One of the simplest steps you can take to protect your business’s cashflow from the impact of late payments is to automate payments wherever possible. Bacs reported that 29% of small businesses who don’t have late payment problems said that payment collection by Direct Debit helps, while more than two thirds said the same about payment by Bacs Direct Credit.
Mike Hutchinson, a senior executive at Bacs, said: “It’s good to hear that relatively simple measures like collecting money by Direct Debit or insisting on payment by Bacs Direct Credit are helping to keep SMEs out of the late payments trap. We’d advise all businesses to investigate if automated payments can help them control their cashflow more effectively.”