Cash is King for struggling SMEs

December 15, 2022

December is, sadly, often marked by widespread redundancies as businesses steady themselves for the new year ahead. Managers hope to reduce costs, the most desperate cutting beyond fat and into bone to ensure the survival of their enterprises.

This year’s final-month cull is expected to have been particularly brutal when it’s finished, as businesses struggle to balance post-Covid debts with soaring inflation, rising interest rates and fragile consumer demand. For others, redundancies will be too little, too late. New figures show that company insolvencies in November, at 2,029, were 21% higher than a year ago. Insolvency Service statistics also revealed 290 compulsory liquidations last month, five times more than in November 2021.

In an economy dominated by services, staff and rent typically represent the largest chunk of a business’s costs. Nonetheless, savings can’t deliver survival when revenue is the bigger problem. A high proportion of November’s compulsory liquidations will have been related to HMRC running out of patience. Too frequently, unpaid corporation tax and VAT have been plugging the gap left by slow or non-paying customers.

Late payment is more than a headache; it’s an existential problem. The pandemic exacerbated cash flow pressures for SMEs, despite guidance (admittedly light) from the government to pay suppliers as promptly as possible. Cash, or lack of it, is arguably the single biggest killer of businesses on the edge. If there is one thing the government could do for small enterprises that would eclipse all other ‘sticking plaster’ initiatives that might emerge as we almost certainly enter recession, it is a formal measure to ensure payment of invoices on a reasonable timescale, particularly those billed in arrears for services or goods already supplied.

It is appalling to think – no, actually, to know – that some businesses genuinely consider it good commercial sense to sit on invoices for as long as possible, even until action is threatened. It isn’t clever; it’s despicable. Suppliers of goods and services neglect due diligence on customers at their peril. Business partners or clients with poor credit ratings are more likely to wreck an SME’s cashflow with late or lumpy payments.

It is imperative that suppliers have the confidence to chase payment and enforce their terms, regardless of how they perceive a customer relationship: history and experience show that a business agreement thought to be fragile in any way will invariably lead to a bad debt, at least in part.

Small businesses facing severe cashflow pressures should seek professional advice on credit management, invoice discounting, overdraft planning and contracts to minimise the impact of late payments. If your business is in this position, please contact us at Buchler Phillips for a free initial consultation. Addressing the cracks now will, in many cases, avoid the need to start again.

Written by David Buchler, Chairman at Buchler Phillips, the UK’s leading independent corporate recovery, restructuring and turnaround boutique firm.

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