Cash flow problems for SMEs can be catastrophic, and when it comes to operating a successful business, there is one thing no organisation can survive without – working capital.

It doesn’t matter how ingenious your product is, how valuable your service may be, or whether you reign supreme over your competitors in terms of reputation or marketshare; if you don’t have the cash to keep your business moving forward, you are out of the game.

The Office for National Statistics are due to release their latest Demography of UK Business report any day now, and last year’s findings showed that whilst business births have increased 0.3% year on year between 2015 and 2016, business deaths are increasing far more rapidly – a full 1.1% increase year on year. These figures represent the closing of the gap between new business birth and business death rates that had been previously growing since 2011 as the UK recovered from the economic downturn, and is thought to be largely attributed to economic uncertainty following the result of the EU referendum. For the same reasons, it is expected that this trend will have carried on into the 2017-2018 statistics, seeing an increase on the 328,000 UK businesses who didn’t make it in 2016. But the reasons behind the failure of these businesses might be surprising – lack of profitability wasn’t always the problem.

What causes profitable businesses to fail?

The answer is clear – 90% of all failed businesses had some degree of cashflow problem according to the ONS, and 60% of new business who failed in 2016 cited “lack of access to capital” as their main reason behind their failure. Lack of operating capital is contributed to by the need to give credit, late payments, bad debt, and the potential limited access to borrowing for SMEs caused by high interest rates and decreased lender confidence. When you find yourself waiting on payment receipts, even though your balance sheet may be in the black, if your wallet at any given time is empty your ability to weather financial storms is hampered.

Business owners want their enterprise to thrive, not merely survive.

Business failure isn’t the only consequence when it comes to a shortage of working capital and cash flow problems for SMEs– many  continue to survive but fail to reach their potential as limited cash flow prevents investment and growth opportunities with contracts turned away due to lack of funding. Importantly, a business’ cashflow statement is the most important assessment tool banks will use when assessing risk and the borrowing potential of business owners.

The C2FO Working Capital Outlook Survey found that 55% of SMEs consider that cash flow was their biggest obstacle to business growth. So, it is clear that cash flow issues restrict business growth, and directly leads to business failure – but how do businesses find themselves with cash flow problems?

The answer is a mixture of late and non-payment, and lack of borrowing opportunities.

The C2FO survey also found that high borrowing costs and lack of access to lending were hugely responsible for cash flow restrictions. Less than half of all UK SMEs are able to access financing at rates lower than 8%, and more than a quarter claim they have no or very limited ability to borrow at all. Since SMEs are considered the lifeblood of the UK economy, making up more than 99% of the business landscape, that isn’t great news for the economy as a whole.

Further research on the subject of cash flow and the outlook for business was carried out by Dun & Bradstreet, who provide commercial data, analytics, and insights for businesses, and reported in their report ‘Small Business. Big Opportunity. The Challenges and Prospects for UK SMEs’.

The report devoted an entire chapter to the destructive impact of late payment on SMEs. A quarter of all surveyed stated that timely payment was the most critical factor for their financial success. The report also found that the average SME is owed £64,000 in late payments, with 11% owed between £100,000 and £250,000 at any given time. 58% of respondents said late payments were putting their business at risk of failure. There is also a negative ripple effect, as 29% of respondents said being paid late affected their ability to pay their own suppliers on time, and 15% of SME owners are using their own personal savings to cover the shortfall.

Once again the government has attempted to respond to the UK’s late payment culture as Phillip Hammond vowed to crack down on the “scourge of late payments” this spring and there are expectations for the budget later this month but waiting for the government to establish best practice guidelines and promote positive change isn’t going to help UK SMEs in the meantime.

What can SMEs do to resolve late payment issues and access working capital?

If cash flow is king when it comes to business growth and survival, SMEs must protect themselves by introducing proper credit checking procedures, and be committed to staying on top of any changes in payment behaviour of existing clients that may be a red flag, beforethey allow overdue accounts to add up. Nobody wants to be in the position of turning business away, but when you are not going to be paid, you aren’t selling anything, you are effectively working for free. The relationship between sales and finance needs to be a reciprocal one, where the best interests of the business outweigh the short-term glory of meeting sales targets.

Dun & Bradstreet’s report found that a worryingly high 36% of their respondents did not routinely credit check their clients. Tim Vine, Head of European Trade Credit, Dun & Bradstreet said “There are steps that SMEs can take to reduce the risk of late payments. First, independently assess the financial and payment risk of customers prior to agreeing credit terms. Most SMEs don’t have the luxury of turning away business, but it is valuable to understand customers’ likely payment behaviour based on past performance. At the very least, this can help to forecast cashflow from perennial slow payers. At the other end of the spectrum, it can be the difference between taking a bad debt hit or not.

“Second, seek alternative sources of finance. Historically, factoring and asset-based lending has been the domain of the medium-large organisation. But the doors are opening wider to smaller businesses; single-invoice financing (where finance can be secured on one invoice with one key customer) can provide a much-needed back-up option when cashflow is being squeezed. Sure, the lender will take their cut, but rates are relatively low so this is a good option to investigate.”

Of course we are delighted that more people are recognising the importance of the vital service we provide in funding SME’s through the use of invoice finance. Combining this with our highly professional and efficient credit control can provide a complete outsourced solution to cashflow management- one that puts you back in control and on the path to success and helps resolve cash flow problems for SMEs.

To find out how we could be working together please get in touch today.