Hard pressed SMEs struggling with cashflow challenges

A huge majority of small businesses are ploughing more money into their business than they are taking out for a least one month of every year.

As firms feel the squeeze of the rising cost of living and soaring fuel bills, a survey shows that typical small businesses will lose money for one-third of the year.

Another major factor is payments from larger companies, with more than half delaying payments to their suppliers, causing mounting pressure on those smaller businesses.

Call to reclassify late payments

This has led to calls for action and to reclassify ‘late payments’ as ‘unapproved debt’, which would prompt a majority of bigger firms to pay on time.

The study by consultancy Accenture and accounting software provider Xero has found nearly a quarter (23 per cent) of SMEs have higher monthly outgoings than revenues for more than six months a year.

In addition, the research shows that 55 per cent of larger firms are delaying making payments to their smaller suppliers despite near three quarters (78 per cent), knowing the effect it will have on SMEs.

Persistent and systemic challenges

Researchers looked at money coming in and out of the accounts of 200,000 small businesses with annual revenues of less than £6.5m that used Xero software in the UK as well as in Australia and New Zealand last year.

Rachael Powell, Chief Customer Officer at Xero, said: “The report reveals just how persistent and systemic these cash flow challenges are for small businesses. Healthy cash flow is essential to a thriving business, yet our research shows that the vast majority of small businesses are having cash flow issues at least once a year.”

Conscious decision on late payments

In justifying late payments, large companies cited inaccurate invoice details as the main reason for payments, followed by it being company policy to prioritise paying larger suppliers first.

They also said it was a conscious decision to conserve cash.

Alex von Schirmeister, a Managing Director at Xero, said: “There must be appropriate incentives for large businesses to pay their suppliers on time, and stricter penalties when it comes to paying late to prevent further cash flow instability.”

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