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Businesses facing cash flow issues

Written by Latifa Yedroudj on Wednesday, 27 July 2022. Posted in Financial management, Finance, Interviews

Managing Director of Xero, Alex von Schirmeister, discusses why late payments are a problem – and what small businesses can do about it

Businesses facing cash flow issues

Since the pandemic, businesses are now slowly getting back on the step ladder following months of uncertainty in the markets. However, there is still a pressing issue that businesses across the board are facing. At least 9 out of 10 small businesses in the UK are facing cash flow challenges, according to a report by Xero. And a big part of these challenges is due to late payments. 

According to another Xero study, 55 per cent of large organisations admitted to paying their small business suppliers later than the agreed payment terms in the last 12 months. At the same time, 78 per cent of these organisations admitted they are aware of the impact late payments could have on the supplier’s business. 

Xero’s Managing Director in the UK, Alex von Schirmeister, discussed the issue of late payments, and why he thinks this is detrimental to the survival of small businesses. Alex explained how late payments have not only a negative effect on businesses themselves, but also put a strain on founders’ mental health when they do not receive income from suppliers on time. Ensuring customers are paid on time is a crucial step toward improving cash flow.

Alex said: “One of the biggest drivers of the cash flow crunch is people not paying their invoices on time and not appreciating the knock-on effect it has on small businesses. Late payments occur for a few reasons. One is the payment conditions that are submitted, which many small businesses are almost forced into agreeing and can be quite damaging, with bigger businesses often having procurement departments whose entire function is to extract the best possible price. And worse yet, we see payment terms that don't get respected and the payments start showing up late.” 

He added: “Our data shows on average more than 90% of businesses have received late payments by at least one month and then around a quarter of businesses over six months. This has a negative effect on business founders, who need to pay rent, make payroll, and more. We have to be aware of the mental health of the small business community. Many small businesses also don't have the tools to actually manage cash flow so they may not be able to look at their accounts properly.” 

Small businesses form the backbone of Britain’s economy, Alex said. He believes the government needs to take more action toward curbing the issue of late payments. He believes suppliers should be more heavily scrutinised and be given incentives for early payments, as well as face penalties for late payments. Alex also urged the government to address this issue further by renaming late payments as ‘unapproved debt’, creating a sense of urgency and moving away from the language which legitimises poor practice. 

He explained: “Small businesses are really the growth engine of this economy. Over the past few years, they have been among the hardest hit, and the government needs to pay more attention to the issues they are facing. On late payments, we've asked the government to incentivise the businesses that pay on time. Meanwhile, businesses should be required to disclose their late payments and adopt ‘unapproved debt’ as terminology that has to be used in annual reports so that shareholders can hold them accountable.” 

Late payments are entirely out of a business’ control. However, there are ways to improve practices and take preventive measures to potentially avoid late payments. Alex urged businesses to build their financial operations within the firm, and better educate themselves with tools to keep track of their accounts. This will help you manage your numbers effectively. And if you don’t have the financial knowledge or tools, it is always best to get some help from other firms that provide accounting services. 

He said: “My first tip would be to work very closely with your accountant or bookkeeper and look at your books regularly. Make sure you're on top of your numbers. We provide software here at Xero that helps you do that, but if you don't know your numbers and if you're not being advised on them, late payments can happen relatively easily and very quickly.

“Finally, make sure you understand both the consequences of the payment terms that you are issuing and compliance around those payment terms. Ensure you understand cash inflows and outflows to make sure you match those up. Are they lined up in dates and in sequenced timing? Is payroll happening after your invoices are being paid or before? And will that create a problem? Paying particular attention to your receivables and your payments is very important for small businesses.”

About the Author

Latifa Yedroudj

Latifa Yedroudj

Latifa Yedroudj has joined the Elite team to fully immerse herself in the business side of journalism, a strong passion of hers cultivated from young having co-run her mother's start up business since she was 18. Her interests lie in a wide range of subjects, including start ups, business, travel, and anything entrepreneurial she can get her hands on. She has worked for some of the biggest names in journalism including The Guardian and The Mirror. Follow her on @latifayed on Twitter for her latest journo rants.

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