Why are SMEs struggling to manage their cash flow effectively?
Cash flow is the lifeblood of any business & as a result irregular flows of income can have potentially disastrous results for a company. SME owners have to manage all of the dimensions of the business and often do not manage the cash conversion cycle with enough care.
SMEs are often not able to dictate the terms of their sales and sell on credit when they cannot afford to do so. Why is cash flow management always a key concern for small business owners?
The way in which a business manages its working capital & speed of its cash conversion cycle will impact on firm’s overall profitability. Cash resources are required to service all obligations, expenses and costs. Without access to cash your business will die, or at the very least not grow.
What strategies can SMEs make use of to avoid cash flow issues?
- Try to have a multiple clients – therefore should one client not pay on time the business will still have incoming cash from the other clients.
- Assess clients very carefully before selling on credit to make sure that they are credit worthy and will have the ability to pay.
- Attempt to have some cash reserves available, or access to capital in place for that rainy day when some of your good clients do not pay on time.
- Linked to the above, have a contingency plan in place, so if clients do withhold payment the business has capital to fall back on.
Who are the usual culprits that pay SMEs late?
Big corporates & government departments are often guilty of not processing payments speedily. This is often due to intricate and bureaucratic payment processes and systems
Why do late payments have a significant effect on SMEs?
- While payment delays can be easily absorbed by larger companies with access to credit, late payments could have potentially devastating consequences for SMEs.
- Late payment can result in not having sufficient capital to pay staff & suppliers.
- The impact of late payments on an SME can often be similar to a worker only receiving half his salary, or even no salary, at the end of the month. Without the payment, the ability to pay bills, buy stock, pay wages is compromised with often disastrous long term consequences.
What advice can you offer SMEs struggling with late payment?
- Try as much as possible to sell on cash terms.
- Negotiate payment terms with customers buying on credit upfront and be decisive on what your terms of payment are.
- Ensure that your invoicing is done correctly, timeously and reflects all of your client’s guidelines requirements.
- Take action swiftly when payments are not on time. Make use of the best experts to ensure outstanding payments are followed up.
As a business owner what steps can I take to protect my company against late payment repercussions?
- Carefully model various scenarios that might result from the terms of payment you offer your customers
- Negotiate alternative options upfront with the customer
- Develop contingency plans if the worst case scenario presents itself;
- Reduce credit terms for other customers until liquidity is restored.
How do I determine the best payment terms for my business?
- SMEs should try to strike a balance between sales (volume, price and terms) and the impact on the cash reserves in case of non-payment;
- Understand your cash conversion cycle in normal and high growth scenarios.
How can I set up my own financial housekeeping so that late payments aren’t as devastating to my cash flow?
- Good housekeeping will tell you whether a problem exists;
- The earlier you know of a problem, more time you have to find alternatives;
- Alternatives such as factoring, informing your creditors of your payment problems can be options to consider;
- Monitor payments as often as possible, preferably in real time.
What are the best options to consider to improve cash flow?
Negotiate your own terms with your suppliers and maintain a balance between selling on cash, on credit and even taking deposits.
Am I legally allowed to charge interest/fees on late payments?
Yes, but make sure it is within the ambits of the law. An option may be to build a finance charge into the initial price and discount for early payment.
How do I salvage a business relationship when payment terms are consistently unmet?
Be pro-active, as once payment is delayed the relationship deteriorates. There is a difference between ‘can’t pay’, ‘won’t pay’ and ‘slow pay’- don’t sell to ‘can’t pay customers’ and stay close to ‘slow pay customers’. SME owners should enforce their rights with ‘won’t pay’ customers.
What are some of the ways I can prepare myself for red tape when billing corporates?
Make sure that you provide the client with all information before sales are made, as this should result in quicker payment. Ensure that you understand their processes and identify the right people and decision makers within the business.