Late payment reduces small business confidence to grow

, Debtor Daddy By November 26, 2017 December 14th, 2023 One Comment
Late payment reduces small business confidence to grow

Three quarters of small and medium sized UK builders say that late payment has directly hampered their business growth according to a recent Federation of Master Builders survey.

According to the survey:

  • 30% have had to delay payment to suppliers,
  • 20% say late payments have stopped them from having the confidence to grow their business,
  • 16% had to borrow additional funds from a bank or other lender,
  • 8% almost went out of business,
  • 5% had to withhold wages and salaries from staff and
  • 4% had to let staff go.

How confident are you?

When you’re a small business it can be hard to raise external finance, instead you rely on your own cash flow to finance growth. When your customers pay late, this reduces your bank balance, increases your stress levels, and as the survey points out, undermines your confidence to invest in growth.

Confidence is a fickle thing. The world’s financial markets rise and fall largely based on confidence. Likewise, your decision to invest in growing your business comes down to your confidence in future revenue and cash flow.

Business growth always requires cash

The faster the growth, the more cash you need. This is because there’s usually a delay between when you invest the cash and when your investment pays off. For example:

  • If you hire a new salesperson – it takes them a few months to become productive enough to bring in more cash than their salary.
  • If you buy a new van or machine –  you’re usually committing to a monthly repayment plan on a loan. This means the cash outgoings increase BEFORE the cash income increases.

To make the strain worse, your income can be further delayed if you’re invoicing on 30 day terms, or if your customers are paying late.

How to boost your confidence to invest in business growth

I’ve been in business since 2007, and here’s my list of practical things you can do to boost your confidence to grow your business:

  1. Keep your accounts tidy – this means ensuring your accounts are fully reconciled at least once a month, though weekly is ideal. Having clean, up-to-date business accounts sets a solid foundation for everything else you do. Banks will require tidy accounts if you want to borrow. If you’re struggling in this area, hire a bookkeeper now and don’t look back!
  2. Forecast your cash flow – modern accounting software like Xero or Quickbooks Online make it super fast to forecast your cash flow every month. This means you know in advance how close you are to running out of cash. Plus, the discipline of forecasting monthly is a good way to keep an eye on expenses, to ensure they’re on budget.
  3. Keep a close eye on your receivables – weekly or monthly monitoring of your accounts receivable is essential for most service businesses, to maintain a strong and consistent cash flow. Give some customers an inch of leeway when it comes to paying on time, and they’ll take a mile. If you’re not careful, your receivables can easily consume one or two months of sales revenue, and you’ve not seen a dime in your bank. We see this frequently with the businesses that seek our help: They had made good sales (and profit), but were seeing very little cash coming in, which causes a lot of stress.
  4. Review your terms of business – having good terms of business in place can save you a world of pain. Talk to your peers, lawyer or local industry association to get the best terms possible for your industry. Solid terms give you a good leg to stand on if things don’t go to plan, such as:
    • Your customer is not happy with your product or service
    • Expectations on payments (all upfront, percent deposit, progress payments)
    • Late payment compensation (charge late fees and collection costs)
    • Events outside your control (bad weather, sub contractors, Russian hackers)

If you want to grow, take the words from the wise. The best businesses we work with have good controls in place throughout their business so that cash flows like clockwork, even when things start to hit the fan.


One Comment

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