Report Shows Surge In Late Payment of Invoices
Cash flow has always been the most important thing in the life of any SME. It is in this size of business where late payment of invoices has, and always will have the biggest impact.
A recent report commissioned by Amicus revealed some quite scary statistics.
The research conducted among 504 SME decision-makers showed that on a regular basis 61% of them see their invoices paid late. Office number 70% said that they relied on being paid during their agreed terms to avoid facing a serious shortage of working capital.
To make things worse, of the 504 SMEs surveyed who had invoices overdue 16% of those invoices remained unpaid after 90 days and 8% for longer than six months.
If an invoice is unpaid after 90 or 180 days, then you must doubt whether it will ever be paid at all. If you apply that theory, then there are 16% of SME turnover is quasi bad debt. In simple counting terms 61% of SMEs should look at their turnover, calculate 16%, then take that amount directly offered bottom-line profit.
If you take that serious step further, any of that 61% of SMEs who have a net profit margin below 16% are loss-making. Very scary stuff.
Remember that if a business shows sales and doesn’t apply long overdue invoices as bad debts then they are profit-making, liable for corporation tax, and heading for a very quick bump in their cash flow. How many of those businesses could survive that bump, who knows?
Don’t Fall Into The Trap
Many businesses the traditional solution has been to use a factoring or invoice finance facility. These facilities always remain option but don’t always serve to solve the root cause.
Without wishing to propose better ways of managing cash or chasing the payment, are some simple pragmatic things that the SME can do. Many of the cloud-based bookkeeping systems now operate an automatic chasing facility or provide the ability to adding a third-party program that will chase invoices for you. SMEs can also seek to recover unpaid invoices through various legal channels, many of which have become more accessible, however none of them will solve a shortage of cash when that shortage of cash already exists.
Likelihood is that at some stage all of us have been part of the 61%. The key is to recognise and act.
There are a whole range of options that the SME access to finance a shortage or a bump in their cash flow. The traditional options of factoring, invoice financing or making a phone call to the bank all remain but often do not offer the best structure or terms.
If you want to know what the best options are your business, then please get in touch. If you are borrowing to finance cash flow, then don’t do it in isolation. Borrow, solve the cash flow issue, and then address the root cause. Never borrow and do nothing else as this will only lead to starting the whole cycle over again.
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By Dave Farmer