Staying on top of cash flow management is crucial for ensuring the long-term health and prosperity of a small business. Cash is the fuel that drives the engine of a business and, as in a car, if the flow of fuel is not regular and even, the engine will shudder to a stop.
However, the timing of payments by debtors is largely beyond the control of small businesses — there are myriad reasons for the payment of invoices being delayed.
Research conducted in 2017 by the Australian Small Business and Family Enterprise Ombudsman revealed that almost half of the nation’s small businesses have more than $20,000 in late payments owing to them, while 14 per cent have more than $100,000 owing.
With so much cash locked up in accounts receivable, it becomes extremely challenging for small businesses to cover costs such as paying staff and suppliers as well as utilities and tax bills. Planning and strategy also becomes much more difficult and, in extreme cases, businesses may be forced to close down.
Ombudsman Kate Carnell highlighted the stories that emerged during the course of the organisation’s research around the effects of late payments on small business operators.
“If you can’t pay your staff because you haven’t been paid, it’s pretty stressful,” the Ombudsman said.
“There were really sad stories of people having breakdowns and significant family issues like marriages breaking up.”
So, in this highly challenging operating environment, how can SMEs take proactive steps to reduce the impact of late payments?
Conduct cash flow projections
Knowing precisely how much a business spends and how much it generates in earnings is fundamental to an accurate projection of cash flow.
Having an accurate understanding of the business’ cash flow position also allows for the testing of various “what-if” scenarios around business strategy.
Using an accounting firm to help with planning and projections can help with a variety of cash flow issues including avoiding erroneous or inadequate modelling and consistent review programs.
An accountant or broker will also be able to avail a small business of the funding options available to the business such as a chattel mortgages or leasing arrangements for fixed assets, for example.
Manage debtors consistently
It’s a fact of doing business that the terms stated on invoices tend to go largely unheeded. It is prudent for SMEs to get into the habit of calling debtors prior to the due date to ensure that all the paperwork is in order and there are no other issues that might affect payments.
In the event of late payment, I suggest making a call seven days after the due date, then a reminder letter followed up by a call at 15 days past due. If necessary, small businesses should send a firmer reminder letter at 22 days past due with a follow-up phone call.
Implement the right working capital solutions
Working capital solutions such as invoice financing allow small businesses to even out fluctuations in cash flow arising from issues such as late payment of invoices.
Under the typical invoice financing model, 85 per cent of an outstanding invoice is paid to the business, with the remaining 15 per cent (less a fee of around 2 per cent) paid once the invoice is received.
Ensure sales and invoicing paperwork is in place
One of the major causes of late customer payments is inadequate paperwork to support the payment.
Suppliers should always request a purchase order from their buyer. This is the document that accounts payable will check to ensure that the correct goods have been delivered on time and invoiced. Invoices should, where possible, note the buyer’s order number.
Suppliers must also ensure that they receive a signed document from their buyer confirming that delivery has been effected. Accounts payable are also likely to check this document to confirm delivery.
It isn’t always possible to obtain a purchase order or delivery docket. In these instances, it is important to make appropriate notes when orders are placed (who ordered, date/time, etc) and to have some evidence of delivery such as a photo or the seller’s rep making a diary note at completion.
Build loyalty with customers
Building strong customer relationships is essential to building loyalty and the long-term health of a business.
Never take customers for granted. Attracting new customers is far more expensive and time-consuming than retaining existing customers. Questions to ask in relation to customer loyalty include:
Minimise operating costs
Small businesses always operate on tight margins, so even the smallest cost savings will have an impact. Tips for saving on operating costs include:
Greg has been in the invoice financing industry for more than 30 years and is very knowledgeable about the challenges small businesses face. Greg founded and was head of two of Australia’s major invoice finance businesses. For nearly 10 years he was on the international board of Bibby Financial Services and was CEO of the group’s Asian and Australasian businesses. Greg has twice been chairman of the Debtor and Invoice Finance Association of Australia and New Zealand and is a past director of the Turnaround Management Association of Australia.
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