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“The dog ate the cheque.” How customers give SMEs cash flow heart attacks


If what they say is true, that cash flow is the life line of every business, then many SMEs are about to suffer a stroke.

According to the recent Bibby Barometer Small Business Survey, every eight in ten SMEs experienced cash flow issues in the past year, most commonly because customers made excuses for slow payments. Umm… our dog ate the cheque.

As a result, in the last year nearly a quarter (23%) of SMEs wrote off a bad debt. Roughly a third (32%) had customers negotiate to pay in monthly instalments and 21% had difficulty meeting tax payments on time. However, you can always trust an entrepreneur to fight back.

What are SMEs doing to manage their cash flow?

84% of the surveyed SME owners put strategies in place to help manage their cash flow. 39% spent more time chasing invoices and 21% delayed payments to their own suppliers. 21% have even gone ahead to refuse to take on more work until invoices are paid. Unsurprisingly, 17% outsourced their debt collections to a lawyer or debt collection company.

Gary Green, Director at Bibby Financial Services Australia said some businesses put in place advance warning systems, with 27% conducting cash flow forecasts and 19% doing periodic cash flow health checks with their accountants or advisers. Yes, the SMEs are no longer taking any hostages!

“Only 17% of companies are doing credit checks on new customers, which is a concern. Credit checks are an inexpensive way of reducing the chance of bad debts,” he said.

What more can SMEs do to solve their cash flow problems?

When an SME discovers a gap in its projected cash flow, the range of potential solutions can be somewhat limited in these difficult times. 27% say they would get an overdraft, 21% would increase their existing overdraft, but 27% would have to resort to dipping into their personal finances.

Another potential solution is debtor finance, and 11% have been researching its use. The latest statistics from the Institute for Factors and Discounters (IFD) for the June 2012 quarter confirm the increasing take up of debtor finance. The June 2012 has had the highest factoring turnover figures on record of $1.39 billion. That is a whopping 41.1% increase on the corresponding June 2011 quarter!

Factoring is defined as the sale by a business and the purchase by the Factor of trade debts on a continuing basis in order to free up cash flow, with the Factor carrying out some part of the sales accounting function.

“We are certainly seeing an increase in enquiries about debtor finance, which is suitable for most non-retail businesses – other than those with very low margins or high levels of doubtful debts,” Mr Green said.

What are SMEs’ expectations for the year ahead?

Expectations for the year ahead remain gloomy with 77% of SME owners concerned about customers becoming insolvent in the coming year. 43% expect that they will have to wait longer to be paid in the coming quarter, and about half (51%) are more concerned about global economic conditions than they were a year ago.

“With only 20% of SMEs planning to invest in their businesses in the year ahead, a cut in interest rates by the Reserve Bank would be welcome,” said Mr Green.

Conducted in mid-August 2012 and the third of its kind, the Bibby Barometer Small Business Survey is a national study run twice yearly, surveying primary decision makers in over 200 non-retail SMEs.

Image by danielmoye