The vast majority of small businesses are spending more money than they are earning for a least one month of every year, according to new research.
As firms feel the squeeze of the rising cost of living and soaring fuel bills, a new survey shows that many small businesses are experiencing a cashflow crunch.
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.
A recent 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, while on average, small businesses are cash flow negative for 4.5 months of the year.
In addition, the research shows that 55 per cent of larger firms are delaying making payments to their smaller suppliers despite nearly 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 £6.5 million 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 delayed 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.”
During these challenging times, businesses must keep a closer eye on their incomings and outgoings to ensure that their cashflow remains buoyant.
If you require support or assistance with cash flow projections for your business, please get in touch with your Seymour Taylor representative or contact us on enquiries@stca.co.uk 01494 552100.
This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at time of publishing on 25 August 2022.