Accounts Payable News^®

SMEs Battle Outstanding Invoices

In difficult times it’s often the weakest who suffer, and in business terms that means the small to medium sized enterprises (SMEs). For many the incipient recession has added to what was already a difficult situation.  Sometimes because the wheels of large organisations turn slowly, and sometimes simply through a lack of care – the days sales outstanding (DSO) quite regularly tip into 80 plus.  It’s not hard to see that if you’re a small business, a figure as high as this can easily have disastrous effects on cash flow.  In fact, stagnant cash flow leads to the collapse of a quarter of all the 40,000 business annually.

DSO Causes Business to Go Under
In recent research carried out by Bacs, it was discovered that a staggering £18.6bn was outstanding to SMEs – a leap of nearly £3bn over last year.  As part of the same study, the average amount owed to each organisation was shown to total £30,000.  A scary figure indeed when it was also reported that almost 30% of these companies admitted that they would go bust when DSO overstepped the £20,000 mark.

It seems that the SMEs are doing what they can to address the issue with over 20% now employing a dedicated person to chase late payments. However, this factor in itself is an additional outlay, which in an ideal world, shouldn’t be necessary.  Another way some companies deal with the pressure of an excessive amount of DSO is to start using factoring companies.  This way, organisations can borrow cash on the back of a credit outstanding.  However, this too comes at a price as the factoring companies will obviously cream off a commission.

Government Acknowledgement
In the current climate, the Government has realised that many SMEs are in real danger of going bankrupt – a result which would have dire consequences for the economy as a whole.  In a recent statement in the House of Commons, Gordon Brown said:

“The key issues for small and medium-sized enterprises are cash flow, and, to some extent, access to finance... They need to be helped through this critical period. ..The Government can ease the situation, and we will help cash flow through prompt payment. The Government have already agreed to move their procurement rules ….We will therefore aim to make SME payments within 10 days. The Government will pick up the cost of that, but it is a small price for greatly increasing cash flow associated with £8 billion of contracts for SMEs.”

Whilst this is a fantastic step in the right direction, with the best will in the world, the government cannot force a supplier to take action against a debtor.  At the moment fewer than 5% resort to the law against those who owe money.  The trouble is that for many SMEs, it could be that their largest customer could be the very one who’s returning the majority of the late payments, and it’s unlikely that the supplier would want to rock that boat until the situation bordered on bankruptcy.

So What Can you Do?

• Check customers carefully before allowing credit – a small amount of time at the start can save a lot of hassle later
• Agree terms: What is the payment method? What time periods are you happy with?
• Send invoices on time and send them accurately
• Monitor payments in against payments out carefully – invest in automated software
• Set time aside every two weeks to chase late customers
• Keep an eye on stock metrics – highlight products which aren’t selling

Build on Your Relationships
Accounts payable departments on both sides of the relationship can help restore the balance between payments in and out.  There is nothing more important to an organisation that its customers – the people who buy their products.  If the relationship between purchaser and supplier breaks down owing to continued late payments, then ultimately it’s the end user of a product who suffers – and that end use will simply go elsewhere.

For example, a company regularly buys a certain range of chairs from a distributor. That company has existing orders for that range – but because the company has defaulted consistently on payment, the distributer decides to end the contract.  In this case, the company’s customers with existing orders are going to be disappointed and are most likely to have to be refunded and are likely to go elsewhere in the future.

Looking Ahead
It’s clear from increasing legislation that the times when excessive DSO were an accepted business practice are beginning to come to an end.  Ultimately a tighter ship with stricter accounting procedures has an effect which gathers momentum throughout the supply chain. Companies cannot afford to think of their role as standalone, these days many organisations either sink or swim together.  Which option will your A/P department take..?

Cash Flow Solutions:

Microsoft Money
QuickBooks