Late payments challenge persists, but opportunities to improve cashflow remain strong
After pivoting with pace and entrepreneurialism during the Covid-19 pandemic, SMEs are now adapting again to a new set of challenges. Our recent Business Barometer research found that over half (52%) of SMEs state that rising costs present the biggest challenge to the running of their business.
But this is not the only challenge they face – overdue payments are also disrupting the smooth running of businesses, with 43% of the SMEs surveyed having seen an increase in late payments since the start of the year.
Unsurprisingly, this dual impact is having a knock-on effect when it comes to cashflow, with almost three quarters (73%) of businesses surveyed reporting that managing cashflow and working capital has now become a priority. As the lifeblood of any business, it’s vital that SMEs take control of their cashflow – even more so during the current challenging economic environment.
Here are four practical steps SME leaders might consider to help them manage their cashflow and remain resilient in the months ahead.
Prioritise automation
The digital revolution was unchained during the pandemic period. As we emerged from a series of lockdowns in 2021, our Global Business Spend Indicator found that, compared with the previous year, 82% of UK SMEs either maintained or increased their spending on technology, including digital infrastructure – demonstrating an awakening to the benefits this investment can bring.
But from one crisis to the next, automation remains a tool for businesses trying to mitigate the new challenges that they face. Of those who indicated they were spending more on technology in 2021, over a third (37%) said their intention was to improve the speed and effectiveness of making and receiving payments.
This comes as no surprise – implementing automated solutions to support cashflow can help put businesses on a stronger footing to weather current storms, be it through simplifying reconciliation,
offering more flexible ways to pay or by saving time on administration. Ultimately, this will help to increase operational efficiency and give businesses more time to spend fostering strong supplier relationships and improving customer services.
Focus on forecasting
Cashflow forecasting can also be a helpful tool in predicting businesses’ future financial position, helping them to gain greater oversight and effectively manage their cashflow. Identifying patterns in spending is crucial to better identifying bumps in the road ahead of time and having the foresight to prepare to tackle any challenges on the horizon.
But to get accurate results, these models need the most recent data – so businesses must make sure they revisit past cashflow forecasts and see how they've changed based on recent trends so they can adjust their assumptions as needed.
Encourage faster payment terms
Once a deal has been signed or a new customer is onboarded, businesses may be tempted to celebrate straight away. But it’s important to remember that a deal in only finished once the payment is delivered on time. No matter how profitable the deal is, payment delays pose a real risk to cashflow.
To help speed up payments and improve their cashflow, businesses can start by negotiating terms with their clients to bring payment deadlines forward as early as they can. They could also ask for a partial deposit upfront to immediately generate some cash.
However, should payments be delayed, then business cards can be a useful asset in helping to manage cashflow. Making payments with a Business Card, like those offered by American Express, business owners can benefit from extended payment terms meaning cash stays in their account for longer, as well as flexible spending power.
Stay on top of invoices and outgoings
But above all, businesses need to take a step back and take a holistic view of their cashflow. With late payments becoming problematic and inflation squeezing many businesses, accounting for every penny is non-negotiable.
As such, having a granular understanding of all business income and outgoings is crucial, meaning businesses should develop a 360-degree view of their working capital to help recognise where processes could be more efficient. This will also help identify where cutbacks may be necessary.
Businesses need to be proactive in protecting cashflow as the economic headwinds strengthen. Learning the lessons from the pandemic, investing in upgrading cashflow and payments infrastructure, and keeping a holistic view of all outgoings will be crucial in maintaining a robust cashflow in the months ahead.
