Thursday, 14 July 2016

How to Deal With a Cashflow Crisis

Almost one-quarter of SMEs have come close to insolvency due to the plague of late payments. According to a survey commissioned by Tungsten in 2015, 23 per cent of businesses came close to financial disaster. 22 per cent of the companies that were surveyed said that large businesses owed them money, while 8 per cent were chasing debts from their public sector clients.

Late payments are a drain on resources, and create a nuisance that most SMEs can do without. But when late payments actually threaten the existence of a business, the fragility of their cashflow becomes clear. As many as 50 per cent of startups go bankrupt within the first 5 years, but a proportion of them could have been saved with better planning.

Good Habits 

Many large businesses have developed habits of paying late to make their own accounts look better. Some will pay after being chased. Others will hold out longer and make excuses. We only have to look at Tesco’s “unreasonable” practices to see this practice executed to an extreme.

SMEs are reluctant to rock the boat when chasing their largest customers. They know that they need the client more than the client needs them. But being paid on time is crucial to avoid a crisis that can eventually shut down a business.

Good habits extend to both sides of the equation. Late payers should certainly be brought to account. But suppliers also need to put measures in place to prevent a crisis, and choose software that will nurture a healthy financial position.

Crisis Point

If your clients aren’t paying, and you can see trouble on the horizon, acting quickly is essential.

Clients with a habit of paying late should be closely monitored for signs of insolvency, and if they continually pay late, you need to consider pausing their work for that client. This can protect against a situation where one client’s debts climb over several months, which is one of the biggest risks to supplier cashflow.

Once invoices are late, late fees and interest need to be added, providing you have given fair warning. This is your right in law. Short-term business loans can also bridge cashflow gaps, but should not be used to prop up a business that is not managing its cashflow proactively, since the interest payments could generate a secondary burden.

Future Proofing

Many payment problems can be prevented – or at least curbed – by using the right software to handle accounts. Your accounting tool should track everything, from your sales and purchase ledger right through to your late payer details, and it should pull in your bank controls and activity so you always have a complete picture.

Credit control functionality is also an essential, because it boosts your chances of getting paid without requiring extra resource from your team. This is particularly crucial in a small business, where one person will be covering multiple roles and is likely to be feeling the strain. The more focussed and informed the credit controller is the quicker credit is managed and cashflow becomes healthy. Automating credit control routines to minimise effort whilst increasing the return is crucial.

If your business is struggling with a cashflow crisis, OneFit’s accounts solutions could help you to deal with client debts more effectively. Get in touch today to find out how we can help.

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