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World Entrepreneurs’ Day

World Entrepreneurs’ Day – Tackling Late Payments And Cash Flow In Crisis

By Colin Timmis, Xero SA Country Manager

The recent easing of Covid-19 lockdown restrictions brought a much-needed respite for South Africa’s struggling economy, but it’s not over yet. Small businesses, who account for nearly half (47%) of the local workforce and contribute more than 20% of the country’s GDP, are particularly vulnerable. As such, they need all the support they can get to rebuild. 

In honour of World Entrepreneurs’ Day on 21 August, we thought it opportune to focus on two common reasons why businesses and start-ups end up in the red – late payments and cash flow problems. To protect as many businesses as possible from defaulting, we need to pay close attention to these two issues and support SMEs in reducing their burden.

Findings from our 2019 State of Late Payments Report revealed that 91% of South African SMEs are owed money outside their payment terms at any given time. Aggravating this issue is the fact that the average SME spends 89.5 working hours annually chasing late payments, thus losing the equivalent of two working weeks each year.

These numbers paint a dismal picture of the state of late payments even before Covid-19 triggered widespread uncertainty. In response to the data we gathered, we formed a Late Payments Task Force to advise businesses on how to get paid on time and stay on top of their cash flow. 

Dealing with late payments

1. Constant communication is vital

The pandemic wasn’t selective in its impact, and many businesses have been adversely affected. To control the damage, reach out to customers and clients early to gauge their situation. Create a human connection and remind them that you’re a small business making a concerted effort to stay afloat since this will increase the chances of your invoice being paid on time.

2. Invoice promptly

Getting an invoice as early as possible to a client or customer will limit their excuse for returning it late. Make the most of your cloud accounting tool’s bulk invoice feature and consider agreeing on a recurring debit order payment on the first or 15th of each month. Accounting technology like Xero also lets you set expected payment dates and track payments, returns and credits and send automatic reminders so you can save time chasing late payments.

3.  Incentives and disincentives

Being firm in applying late payment charges or interest is an efficient way to illustrate your intent on getting paid on time. Conversely, small early payment discounts, especially at a time when everyone is financially stretched, show goodwill and may encourage clients to pay in advance. Also consider running credit checks on prospective clients, as a poor credit history could point to some liquidity concerns.

Improving your cash flow

1. Develop a comprehensive cash flow strategy

It’s now more important than ever for businesses to have an informed view of their cash flow to forecast, plan, and make the right decisions about their future. A critical aspect of helping them recover is to use the right technology. Being able to track cash flow in real-time and having an end-to-end view of money flowing in and out of the business every week will put you and your business on a solid footing.  

2. Formulate a cash flow forecast

A cash flow forecast is a financial tool that helps estimate the amount of money that’ll move in and out of your business in a given period.  

To produce a simple forecast, start with revenue. Many SMEs are generating less income than they would otherwise, so try to extrapolate from customer buying trends to establish an estimate of how much income your business will produce over the coming months.

The next aspect to consider is your expenses. First, calculate how much money leaves the business in a typical month, then calculate how much has been leaving during a month in lockdown. Here it would be best if you ask yourself difficult questions about how much of a drop in sales you can sustain realistically.

Xero’s recently launched Short-term Cash Flow is a great tool to determine this. By projecting bank balances 30 days into the future, it shows the impact of existing bills and invoices if they’re paid on time. This will help you to do accurate scenario planning and make changes to business plans on the fly.

3. Use smart technology to lessen disruption

Apart from making it easier to track the financial health of your business, technology can also help you to access funding easier. Platforms like Xero integrate with alternative lenders such as Bridgement and Retail Capital so that SMEs can share their financial data and get a loan approved with a few easy clicks. These alternative lenders usually assess and make decisions quicker than traditional lenders, which is valuable if you need to access capital quickly.

In a remote working environment, cloud platforms will also make it easier for any team member to keep track of cash flow. Several people in the business, including your accountant, can simultaneously review your company’s figures from anywhere.

The way forward

Late payments and poor cash flow severely impact businesses under normal circumstances, but right now it’s become a make or break situation for SMEs. While the government support and stimulus packages are a welcome relief, we need to start considering long-term, sustainable solutions. Tackling late payments and ensuring that all SMEs have a stable cash flow is the ideal place to start.

At Xero, we have put together free training videos and resources to help. Visit the Business Continuity Hub to learn more.