Updated: Dec 15, 2018
It was Sunday afternoon and I was drinking coffee with a friend who owns a small business. The topic of conversation – slow debtor payments. While basking in the sun we discussed for some time the various complexities he was facing. However each time we would come back to slow debtor payments cash flow concerns. This made me asked the obvious question, why?
As I consumed yet another coffee (yes, I did sleep that night) I reflected back on the importance of cash flow. You see, I see cash flow as the lifeblood of any business. So what happens when receipts slow up and the outgoings don’t?
I have recently read a report from the Australian Small Business and Family Ombudsman, Kate Carnell which was released in April 2017.
Simply, too many Australian small businesses are in financial stress due to their outstanding invoices being paid a month or two late. In fact 90% of small business go broke because of cash flow issues.
I have heard of some challenging circumstances where some payment terms are being stretched out to 120 days. Challenging indeed.
Australia has two million small to medium businesses (SMB’s) who play a major role in the economy. Slow or late payments to SMB’s have a significant effect across the economy.
Poor cash flow means some businesses end up defaulting on their obligations to staff, suppliers and other business owners. It even flows onto payments to the tax office.
The ombudsman cited data collected from 2,783 Australian businesses that shows that the 30 days or less standard payment time favoured by 96% of businesses was largely ignored.
Half of Australian SMB’s reported more than 40% of invoices were paid late
One in five businesses reported an average payment delay of more than 60 days
Almost one in two businesses have more than $20,000 owing to them
One in four more than $50,000
14% owed more than $100,000
57% needed to borrow or use credit cards due to late payments
MYOB recently released a survey which found among other things that 32% of small business owners struggle to pay regular expenses such as rent and power bills when invoices are not paid and 35% reported their personal finances were impacted.
According to research, deferred or late payments caused significant stress, anxiety and other mental wellbeing issues for almost 80% of the small business. One third were at risk of insolvency or liquidation.
I am not sure about you, but I am reluctant to issue stern letters of demand, engage debt collection agencies or begin legal proceedings when owed money. From my point of view I am concerned on the negative impact on goodwill and winning future work.
So why don’t small businesses follow up debtors and make it a priority? Simple, they are too busy. My experience has been that small business owners are more focused on operating and growing including generating more invoices. Not chasing debtors.
So how much time do small business spend chasing up money that is owed each week?
46.1% spend less than an hour per week chasing payment
41.4% spent 2 to 5 hours
12% one to two days a week
So what do we do? There is no simple, easy answer on this one. Hard work, commitment, focus and measurement.