Cash flow tips for SMEs

For brokers looking to build and cement a position as a trusted adviser to clients, it’s well worth having conversations around the following crucial areas:

• debtor days
• creditor days
• stock holdings
• borrowing facilities.

Here are some good business conversation starters:

Debtor days: while it should be a given for your clients to look after the basics, many SMEs don’t have all the correct details required on invoices – are they stating payment terms, cross-referencing purchase orders and saving proof of delivery in the event of query or dispute? If payments are not made on the due date, they should be making regular reminders and follow-up calls.

Stock: find out if they understand which lines are fast- or slow-moving and suggest they ensure holdings are related to speed of movement. They shouldn’t hold on to stock that is date-sensitive or in danger of becoming obsolete – turn it into cash at a discount (even if it means taking a margin hit).

Creditor days: are your clients paying bills before the due date, and if so, why? Premature payment is inadvisable, as is pushing payments out too far without agreement. Are there credit terms shorter than the industry norm? It’s worth remembering that paying early for discounts helps profitability, but not cash flow. Are ATO obligations (reporting and payment) up to date? Slippage here is often the first sign of cash pressure building.

Funder relationships: are your clients operating on a best practice, ‘no-surprises’ basis, providing their bank or funder with the required information in a timely and professional manner? This is crucial, because facilities being withdrawn or reduced will have the biggest negative impact on cash flow.

Hopefully your clients are enlisting your help to review their funding arrangements on a regular basis, but if they are, they’re in the minority! Results of the latest Scottish Pacific SME Growth Index show that fewer than five per cent of SMEs are actively keeping an eye out for the best funding deal, and only one in five perform a regular bank review.

Brokers have a great opportunity to help clients understand the importance of making sure there is headroom for growth – they should not be waiting until facilities are fully utilised and there is pressure to keep within limits.

Get them to consider all funding options – one of the reasons we receive so many calls is that our debtor finance facilities provide access to working capital that would otherwise be tied up in receivables for 30 to 60 days or more, and this period tends to be extended in January and February.

In the lead up to the festive period, brokers can remind clients to be alert for these signs of looming trouble:

• Debtor days extend outside industry norms. Are customers struggling to pay, or just won’t pay? Is there an issue with collection activity (for example, with statements, reminders and follow-up calls)? Does the administration around the invoicing process need to be tightened up? Coming up to Christmas, get your clients to check their customers’ seasonal opening hours – if the customer is closed, encourage early payment.

• Stock holdings are increasingly out of sync with sales. Is there a build-up of slow moving stock items or out-of-date stock? Is too much stock being held? Is it possible to reduce stock holdings? Is it possible to move towards JIT (just in time) stock holdings? Use the festive season to have pre- or post-Christmas specials and reduce stock.

• Creditor days are lengthening without the supplier’s agreement. Are ATO obligations not being met on due dates? This could be evidence of cash pressure building.

• Pressure on funders’ facility limits. Are lending covenants being breached? Is there a danger that funders may look to reduce facility limits? Prepare cash flows that cover changes that are certain to happen over Christmas and New Year.

To ensure your clients maintain a healthy cash flow in the post-Christmas period, it’s well worth initiating these conversations with them now.