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The 7 reasons why SMEs struggle with cash flow management

Find out the 7 major reasons why your clients’ businesses struggle to achieve a positive, healthy, consistent cash flow.

There are 7 major reasons why your clients’ businesses struggle to achieve a positive, healthy, consistent cash flow. While it might be tempting to attribute cash flow worries to poor operational management, that’s not exactly fair. SMEs are just as often hindered by their customers’ subpar practices as they are by their own faults. 

Let’s quickly dive into the most common reasons preventing SMEs from generating a positive cash flow.

1. Late payments 

Late payments are a death knell for SMEs. Research suggests that 55% of large organisations pay small business suppliers late, even though 78% state they’re aware of the impact this has on their suppliers. An estimated 400,000 SMEs in the UK are currently grappling with late payments—this is hardly surprising, considering 49% of invoices issued by SMEs have been paid late.

Indeed, some have even gone so far as to describe late payments as like “crack cocaine” to large businesses.

Late payments put SMEs in a tricky position. They can wail, gnash their teeth, and demand payment—but they ultimately have no control over whether customers pay up on time. And the more havoc they wreak with customers, the greater the likelihood that the customer will stop doing business with them going forward.

Is it worth ruining a potentially profitable future with a large customer over a single unpaid invoice? Probably not. Except, when SMEs are consistently waiting on payments, it becomes increasingly difficult for them to sustain their business.

This is especially problematic if your clients’ business hasn’t yet had the opportunity to build up large cash reserves. Well-established companies usually have some money set aside for a rainy day. They might have a negative cash flow one month as a key customer delays payment, but they can happily dip into their reserves and wait until the payment comes through. However, if your clients are living hand-to-mouth, then late payments can have a devastating impact.

2. Out-of-control overheads

Some SME owners are so focused on ‘growth at all costs’ mindsets that they fail to realise their overheads are too high. This attitude is hardly surprising when you hear tales about how world-beating businesses, including Uber and Airbnb, took a decade and eight years respectively to turn a profit for the first time.

Unfortunately, unlike Uber and Airbnb, most SMEs can’t rely on million-pound lifelines from venture capital (VC) firms. SMEs mustn’t fall into the trap of believing that growth is more important than cash flow. Sure, it’s great when your clients open a new location—especially if they’re bringing in new customers. However, if they’re spending so much on rent that they can’t pay their staff, then this spells trouble.

There’s a fine balancing act here. As your firm knows, SMEs’ overheads need to be as low as possible but as high as necessary. They should spend wisely, investing in areas that’ll generate tangible ROI. Partnering with forward-thinking accounting firms who use innovative tools to help clients manage their cash flow will bring untold benefits. Conversely, spending thousands on a brand refresh solely consisting of a slightly different logo and a new tagline isn't the wisest idea.

3. Increasing costs

While some SMEs are overly cavalier with their overheads, others may fall victim to circumstances out of their control. Take rising costs, for example. With inflation reaching 10.1% in the UK, the cost of doing business is increasing at a rate of knots. Rent, wages, utilities, and even admin costs are all spiralling out of control. Whether it’s the hike in national insurance contributions or post-Brexit costs of doing business with the EU, SMEs are facing hurdles every which way.

Research suggests that SME expenses rose by 18% in 2021—and this figure is likely to increase further in 2022. Compare this to 2020, when expenses declined by 1%, and you can see just how much the landscape has changed in only a year. SMEs, and their accounting firms, must watch over their cash flow with an eagle eye. You should help them proactively identify opportunities where they can reduce costs while still fuelling their business with the finance it needs to operate successfully.


4. Grappling with expensive debt

As the adage goes, “you have to spend money to make money”. However, when your clients are just starting out, they might not have any money in the first place. This is where loans come in. SMEs often turn to banks, digital lenders, friends, and family to seek the necessary capital required to open their doors.

There’s nothing wrong with this—most SMEs rely upon loans in some fashion. However, it can become a problem if your clients are borrowing money they can’t afford to repay. Perhaps their business isn't performing as well as they’d hoped. Or, they might be doing sterling work but be hindered by high interest rates.

Given the turbulent economic waters in which we find ourselves, it’s becoming increasingly expensive for SMEs to seek capital, and to pay it back. SME owners might find themselves having to allocate what would otherwise be valuable working capital to servicing (aka, repaying) their debts. If they’ve borrowed more than they’re bringing in, and if these loans come with particularly high interest rates, then trouble’s on its way.

5. Excessive stock

Stock management is equal parts art and science. If your clients don’t have enough stock, they might be unable to fulfil customers’ demands or generate revenue—both of which will severely impact their business. This is a particularly thorny issue, given recent supply chain disruptions. SMEs can no longer rely on global supply chains to be consistently reliable, leading many to overindulge for fear of being left short.

While this approach has a certain logic, there are also pitfalls. Holding excessive stock may ensure your clients can fulfil customers’ orders—but this comes at a cost: storage. Worse still, if customer demand dips and they can’t get rid of their stock, then they’re paying to store expensive stock that won’t generate any revenue in return. This is a lose-lose situation.

Work with clients to determine how much stock they should buy at any one moment in time and where/how they should store it. Analyse their historic sales figures to predict potential demand going forward. If you think they’re making a mistake—such as buying too much stock in one fell swoop—advise them to be more cautious. Outline just how much it’ll cost the business if they’re unable to get rid of their excessive inventory, and suggest how they can stock up on inventory while keeping storage costs as low as possible.

6. The knock-on impact of Covid

While mandatory mask-wearing and lockdowns are firmly in the past, businesses are still grappling with the impact of the pandemic. Recent research suggests that Covid will cost UK SMEs over £126.6BN. Considering there are 5.6 million UK-based SMEs, that amounts to an eye-watering £22,607 per company.

Worse still, over 840,000 SMEs don’t think their business will ever return to pre-pandemic levels.

Many SMEs flocked to government-backed support as the pandemic hit. Schemes such as the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) acted as valuable financial lifelines. 1.5 million Bounce Back Loans alone were issued, amounting to over a quarter of all UK SMEs. Your firm likely played a crucial role in helping clients seek out, apply, and be approved for these loans.

Unfortunately, all good things come to an end. Loans provided invaluable cash injections at the time—but paying them back is another matter entirely. Over 16,000 companies that received government loans during the pandemic have gone into liquidation without being able to repay what they owe.

One thing’s for certain: Covid continues to affect businesses. Some might have seen their growth curtailed at just the wrong time and are still struggling to reclaw precious momentum. Others, meanwhile, are finding that the cash injection they so heavily relied upon now costs more than they can repay.

7. Inadequate cash flow forecasting processes

Last but certainly not least, SMEs struggle to maintain a positive cash flow due to improper cash flow forecasting processes. They have a poor grasp over their bookkeeping and financial statements—meaning they have no way to predict what will happen in the future. Rather than proactively identifying potential bottlenecks and hurdles, they're perpetually on the back foot, simply going from month to month in the hope that things eventually turn around.

This is no way to run an SME. Unfortunately, many entrepreneurs lack the financial skills to translate their business’s raw financial data into forward-thinking forecasts. That’s not their strong suit, so they ignore it entirely and simply focus on what they’re good at.

We empathise with SME owners in this position. However, that’s not to say we advocate sweeping potential financial problems under the rug. Quite the opposite.

By working closely with their accountants, SMEs can outsource their business’s cash flow forecasting processes. Your firm will help clients predict the future, spot potential hurdles, and devise plans for how to avoid potential trouble down the road. However, this is impossible with traditional cash flow forecast methods.

If you’re still relying on outdated, Excel-based approaches, you’ll deliver inaccurate predictions that generate subpar results. This benefits nobody.

With Futrli, your firm can wrestle back control of your clients’ cash flow once and for all. Gain detailed predictions that spell out their business’s future. Identify potential bottlenecks well before they ever arrive and advise them to take proactive measures ahead of time to minimise their impact. Help them run a predicted business, one where they can account for every single penny that they earn or spend. Never again worry about their cash flow.

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