Cash flow management: expert tips for keeping your business out of the red

10 March 2016 -

Cash flow is one of the biggest killers of SMEs, with around half of small businesses failing in their first five years as a result of poor cash flow. Here, Insights highlights some of the pitfalls to avoid to ensure your business doesn’t fall victim to a lack of cash in the bank

Jermaine Haughton

Without the financial clout of their larger, publicly-traded counterparts, small businesses need constant access to cash to purchase inventory, meet operating expenses and pay employees, creditors and suppliers.

According to Office for National Statistics (ONS) stats, only 45% of startups survive beyond five years, while the insurer RSA suggests that 55% will fail to make their fifth birthday.

More specifically, successive studies have shown that around 80-90% of small businesses fail because of bad cash flow.

While revenue and profits are important, many businesses may continue to trade in the short- to medium-term even if they are making a loss by delaying paying creditors or working out an alternative payment method.

However, once bosses run out of cash, without lending they can no longer meet immediate daily needs, and businesses become extinct.

Research from debt recovery law firm Lovetts found 56% of the County Court Claims to recover debt in the UK in 2015 resulted in a County Court Judgement (CCJ) because the debtor was incapable of paying.

Experts such as Asset Based Finance Association say one the major causes of SME woes is a “chronic late payment culture” with companies now waiting on average 72 days before being paid by bigger firms.

Nearly two-thirds of UK businesses experience late payments of 90 days or more, with invoices worth £55bn remaining unpaid or outstanding, according to payment systems provider Sage Pay.

Over the course of a year, the study showed that small firms waste some two weeks chasing invoices, time which could be spent strategically growing their business.

"Late payment means reduced profitability, knock-on late payments to suppliers, and reduced business growth," an FSB spokesman said. "Thousands of small firms even go bust each year purely because the cash flow dries up, not because there's anything wrong with the underlying business."

In the West Midlands, for example, the average small business in the region is owed more than £107,260 in outstanding invoices, an increase of more than 85% in two years.

New research by experts at Hitachi Capital Invoice Finance shows that the importance of businesses having a steady flow and access to cash day-to-day is only going increase throughout the rest of 2016.

The report shows that more businesses are in search of finance, with the total credit offered to businesses in the tax year commencing April 2015 totalling £841m, up from £823m the previous year.

With many businesses following the trend of accessing alternative financial services such as payday loans, refund anticipation loans and rent-to-own agreements, Hitachi’s lending figures show three clear peaks in demand from SMEs for funding increases, with the number of applications rising significantly in April, July and October on an annual basis.

John Atkinson, head of commercial business at Hitachi Capital Invoice Finance said: “Business activity in 2016 is likely to be impacted by a number of external factors, in what is set to be a volatile landscape for political and legislative change. Many of our customers have found it necessary to pursue alternative routes to finance, as banks look to reduce the risk profile of their lending portfolios.

“In general, the days of firms using an overdraft facility as a ‘stop-gap’ to ride out cash flow disruption are over, businesses must act now to produce accurate forecasts for the year ahead.”

April is expected to be a particularly turbulent month for businesses, due to the onset of a range of corporate legislation. The month will see the introduction of the National Living Wage, translating into an increased wage bill for many businesses and the implementation of new immigration laws which will prevent employees earning less than £35,000 per annum from staying in the UK for more than 5 years - exacerbating the current skills shortages in many sectors.

Atkinson explained: “When forecasting activity and productivity during the summer months, the impact of the holiday season must be acknowledged. Often, a depleted workforce during July and August can have a negative effect on business continuity, with limited trading activity and the reduced ability to chase prompt payment denting cash flow.”

The report also stated that October saw the biggest rise in demand for cash flow, as businesses invest in themselves, whether it be construction firms gearing up to capitalise on emerging contract opportunities or retailers filling shelves to prepare for the inflated sales during Black Friday and in the run up to Christmas.

“It is vital that SMEs pay close attention to their working capital during 2016 and retain the agility to react to market changes,” Atkinson added. “The possibility of an EU referendum, which is due to be held as early as June, alongside expected rises in interest rates could impact business confidence. For firms that manage to protect cash flow, either organically or via the securing of external finance, success, stability and growth await.”