CASH IS KING
Feature by Fiona Scott
CASH IS KING - UNDERSTANDING CASH FLOW IN BUSINESS
A profitable business can be crippled , or even destroyed , by clients not paying their bills on time . Any business owner will know having no cash in their account to pay their own bills can be a barrier to growth and success . The issue of cash flow and liquidity is central to any business – large or small . This has been evidenced once again with the collapse of Carillion and there is now to be a forensic examination into what happened .
Carillion ’ s payment terms were allegedly 120 days . There is also talk of suppliers with poor payment practices being excluded from winning major government contracts in the future .
Behind the headlines of theses bigger business stories are the thousands of small and micro businesses which grapple with late payment day to day – albeit on a smaller scale .
Recent research by business finance firm Liberis suggests around £ 14.9 billion is owed to small businesses in late payments . The company found 58 per cent of those businesses questioned were owed up to £ 10,000 and 27 per cent owed over £ 20,000 .
Retailers seem to be the type of businesses which suffer most acutely from this lack of cash flow . Yet for a micro or small business even being owed £ 1000 can have a big impact on the ability to continue in business from week to week .
Cloud accountancy company Xero said in its latest Small Business Insights Report that 52 per cent of invoices with 30 day payment terms , issued through its system in 2017 , were paid late . The average payment time of an invoice was actually 40 days .
The problem is so great – it ’ s been dubbed the ‘ late payment epidemic ’ - it ’ s one of the reasons behind the creation of a new role of Small Business Commissioner . The office and role were created by the Enterprise Act 2016 and are designed to ‘ tackle late payment and
16 THE BUSINESS EXCHANGE 2018 unfavourable payment practices in the private sector ’.
The Commissioner , Paul Uppal , currently has the powers to name and shame companies which do not pay small businesses on time – yet he does not have the power to issue fines yet . He called for this power before a government committee recently .
His has not been an easy role to fulfil as many small businesses do not want to be named when they make a complaint about another – often larger business – which has not paid its bills within a reasonable period . These small suppliers can often fear it will damage the relationship with their client .
Jason Dutton , MD of 4Networking , said : “ Late payment is a thorny issue for most small businesses . Many find they are spending hours and sometimes days every month chasing unpaid invoices to enable them to pay their own bills or invest in their own activity which could include marketing or even committing to hiring more staff .
“ SMEs need to know this is being taken seriously by government and by bigger businesses which need to show a greater commitment to settling their bills on time and recognising the importance of the smaller enterprises to the UK economy as a whole .”
However some small business owners don ’ t actually help themselves when it comes to cash flow – often because they simply don ’ t understand it or won ’ t admit when there ’ s a problem .
“ Government and bigger businesses need to show a greater commitment to settling their bills on time and recognising the importance of the smaller enterprises to the UK economy as a whole .”
Oli Thomas , co-founder of Wiltshire ’ s technology-based accountancy firm , Purple Lime said : “ Many businesses struggle to manage a positive cashflow because they are under capitalised from the outset i . e . not enough funds to support initial stages of trade so a good plan is essential .
“ Sometimes shareholders or owners can put unnecessary pressure on the cashflow by drawing funds excessively and debtors and credit control are often not managed effectively .
“ Talk to someone who knows and who can guide you intelligently using the most modern resources available .”
Mike Lloyd , managing partner of Haines Watts Swindon said : “ Profitable businesses go bust every day . Why ? For one reason only , they run out of money .”
Successful and long-lasting businesses face this fact by embracing – often with professional help - budgeting and financial forecasting .
Mike said : “ Budgeting creates a baseline to compare actual results to determine how they vary from the expected performance .
“ Financial forecasting estimates a company ’ s future financial outcomes by examining historical data . This helps determine how to allocate budgets in a future period .”
Nicki Kinton of NK Credit Consultancy , supports business owners in the South West by being their outsourced credit controller . With a background in credit control she will do the ‘ gumshoe ’ needed to get bills paid . This can be chasing bills by phone or ensuring terms and conditions are in place – and clearly understood by both parties .
“ Cash is not the value of the sales you ’ ve made , or your profit margin , it ’ s much simpler than that . It ’ s the money you have in your bank account available to spend right now . You can make all the sales in the world but if you ’ ve not been paid for them you have no cash to spend on your own business ,” she said . Her top tips include : * shorten your payment terms – be firm and stick to them . * don ’ t bite off more than you can chew – ensure you are not overtrading . * don ’ t spend money before you ’ ve got it – don ’ t buy or invest on the promise of money , wait until it ’ s in the business bank account .
It can be quite easy to spot a client having cash flow issues according to Hilton Baird Collection Services . One clue can be sudden and unexpected excuses which may include suggesting your service or product was not up to scratch – when there have been no previous issues and there ’ s no obvious problem this time .
Other signs include unreturned phone calls , sudden changes in payment patterns and behaviour around payment .
Many business owners find it difficult to admit they cannot afford to pay a bill on time . Tackling this head on is often a better solution as it gets the matter into the open and allows for a payment plan to be actioned .
Anyone interested in the Small Business Commissioner can find out more by visiting : smallbusinesscommissioner . gov . uk