Cash flow problems for small businesses seems to be on the rise. So much so that company owners are struggling to pay staff wages. According to new research from QuickBooks, as many as one in seven small business owners are experiencing cash flow problems.
So, what’s the main cause of cash flow problems?
One of the main issues for SME owners is late payments from clients and customers, which has a knock on effect for their staff and being paid on time. The BACS payment scheme has released statistics showing that late payments to SMEs have amounted to £2 billion! So it’s no surprise that small businesses are feeling the pinch with 12% saying it’s standard for customers to take one month or longer to pay and 10% saying they’ve had customers avoid paying for 181 days or more.
When a company has cash flow problems, it can’t pay its staff which means they lose those staff members and as an effect, they can’t take on extra work. A bit of a vicious circle for any business owner. On average, turning down work loses them £26,000. The government has taken notice of this and in this year’s spring statement they announced the introduction of payment practice reporting.
This means large companies will be obliged to review and report how and when they’re paying their suppliers in their annual accounts.
Getting back on track through Covid19
2020 saw a global pandemic that has altered the way we go about our business. The devastation to the economy the world over meant that businesses had to adapt and change to survive. Many businesses owners had no choice apart from furloughing their workforce. Businesses owners received government grants to cover rent and tax holidays to ease the strain. Government-backed Coronavirus Business Interruption Loan Scheme / CBILS and The Bounce Back Loan Scheme / BBLS were offered to businesses with zero fees and interest for the first 12 months of lending. Businesses looking to get back on track, radically changed their processes to cope with social distancing and new government guidance.
When a company has cash flow problems, it’s easy to look for the fastest and cheapest loan meaning they take on debt because of clients paying late. On average, small businesses have £31,055 in debt owed to them and this figure is only increasing. Pair this with poor money management skills and you’ve got a recipe for business disaster. When businesses manage their money poorly, maybe through using archaic programs and manually calculating their business bill payments, it’s easy to forget about business expenses and claiming that much-needed money back.
Self-employed are hit hardest
Self-employed people make up the biggest percentage of workers who are hit hardest with cash flow problems. If they are new to business, they can become vulnerable, from not writing up proper contracts for fear of scaring away their first few clients so they have no leverage when it comes to being paid on time or even being paid at all, to not realising what expenses they can claim for and how. Self-employed workers are also three times more likely than any other group in the research study to apply for a loan, again making them more susceptible to getting themselves in major debt and the spiral begins.
What can be done to make cash flow healthier?
VP and county manager at Intuit QuickBooks, Chris Evans, said: “It’s time to realise digitisation in the back office is not just a nice to have, but essential to the prosperity of any company.“With features like automatically nudging clients to pay invoices, digital accounting can help tackle bad payment practices, reducing the time to get paid and free up time for business owners to invest in themselves or their business”
Businesses taking their accounts digital see a massive rise in clients paying much more quickly. Raising an invoice from your mobile is quick and easy and makes the customer remember that they, in fact, do need to pay you for the work you do. All of this can also be tracked and updated at any time, meaning you can be prompted if you need to check that the payment has gone through.
Essentially, it gives clients and customers less time and no excuses of ‘the invoice must have got lost in the post’. Making small changes like these can really clean up a small businesses cash flow problems, helping to ‘unblock’ and allow the cash to flow freely once again.