FSB National Chairman, Mike Cherry, has once again raised the scourge of late payments on small businesses by writing to the Chairmen and CEOs of all FTSE100 companies urging them to take immediate action to create a new payments culture in the UK.
The FSB’s own research shows that a massive 84% of small businesses experience being paid late, with 33% saying that at least one in four payments arrives beyond its due date.
And lobby Mike Cherry should, because that’s his job, but the question has to be asked whether it is realistic to ever expect late payments to go away.
We have seen numerous initiatives over the years trying to address the issue, including the Government backed, Prompt Payment Code, but here we are today seemingly no further forward. Indeed, the FSB’s research states that 37% of SMEs feel that payment terms are lengthening not improving.
The need to take charge
Rather than wait on a culture change, small businesses that have regard for their own survival must plan for late payments. They can do this in several ways.
Firstly, when preparing cash flow forecasts, they must be realistic about when payments are going to be received. They might not like the fact that they’ll be paid in 60 days, but it’s important that their projections reflect reality.
Secondly, a rolling cash projection needs to be created and monitored. A forecast created 6 months ago is worthless if it’s not constantly updated with the actual performance.
Thirdly, small businesses need to know in advance when delayed receipt of a scheduled payment is going to have a critical effect on their cash flow. This means creating a system of early notifications and not simply discovering on the day that there is a crisis because the money hasn’t arrived. Knowing that timely receipt of certain payments is important will allow calls to made to the customer to make sure the invoice is scheduled for payment as agreed – and a contingency plan to be developed if it’s not.
Creating a practical solution
Of course, none of this is easy, particularly for the small business that lacks the knowledge or resources to be meticulous about managing the cash position in this way. Even accountants and professional bookkeepers can struggle to keep up with numbers that, by their very nature, are fluid.
This is the primary reason that we created CaFE. We recognised that it wasn’t realistic to expect any small business to be constantly checking forecasts, but knew that the problem wouldn’t go away simply by ignoring it.
We, therefore, built a system that automates the monitoring and forecasting process as far as possible. By plugging into cloud accounting software and overlaying increasing amounts of intelligence on the payments and receipts, we have been able to create an automated 90-day cash projection that requires no manual forecasting or budgeting. A system of alerts sends a notification to the user’s in-box or smartphone when a cash shortfall is projected or when timely receipt of a scheduled payment is critical. This empowers the business owner to take prompt and decisive action.
The price of waiting
Small businesses are regularly placed at significant risk of closure because they don’t properly anticipate when payments from customers are going to be received.
The FSB estimates that 50,000 small businesses close every year at a cost to the economy of £2.5bn per annum as a result.
We don’t advocate a late payment culture, far from it, we are adding our voice to the lobby, but we do believe that small businesses need the resources to look after themselves.
Achieving a fundamental culture shift in the boardrooms of big businesses is a laudable aim, but not something that anybody should hold their breath for.
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