Poor cash flow is one of the main reasons why 60% of small- to medium-sized businesses in Australia cease operations within their first few years. It’s a serious problem that you'll want to avoid at all costs - of your cash flow isn't up to scratch, you’re running out of money little by little. Needless to say, when your cash on hand is decreasing, you'll struggle to pay for all the things that will keep your operations running - poor cash flow will kill your business faster than your competition ever could.
There are several reasons why a coffee roaster or a bakery owner like you may experience poor cash flow. Over-investment, high overhead expenses, too much stock, or poor financial planning are some of the causes, but most of the time, it’s because of not getting paid on time. In other words, late payments.
MYOB revealed in their 2016 SME Snapshot survey that accommodating late payments creates a bad cash flow cycle inside a business that can be fatal. CEO Tim Reed, in fact, said the results of their survey indicated there’s a need for immediate action to be put in place.
"It’s unfair that many small business owners are being subjected to late payments on top of the day to day challenges of running their own business," Reed said. "The financial health of Australia’s small business owners should be a top priority and the research indicates this also has a direct impact on their own personal well being."
In particularl, MYOB’s survey shows:
- 77% or more than three-quarters of Australian small- to medium-sized businesses said they had been negatively impacted by customers not paying on time
- 52% said delayed payments gave them heightened stress and anxiety levels
- 35% reported their personal finances were affected
- 32% said not getting paid on time had impacted their ability to cover operational expenses
Late payments are a growing issue right now in Australia, with more and more businesses taking comfort in not paying promptly. In fact, it has been said to be the “silent killer” of startup businesses. Its effects go beyond just not being able to pay your staff and expand your operations, clearly, it can also threaten the existence of your business.
Take note that for you to get into a positive cash flow position, you must have a larger amount of money coming than going out. But if your customers don’t pay you on time, your cash outflows will certainly be bigger than your cash inflows because you don’t have a sufficient money on hand. This results in you being incapable of paying your wages, rent, and the other things you need for your day-to-day operations. When this goes on, you may be left with no choice but to use your personal money or the money reserved for future business expansion just to cover the shortfall.
And not only that - the inability to pay all your outgoings may also lead to a domino-effect of cascading problems.
First, it will be difficult for you to fulfill all your orders. Since you don’t have the money to purchase raw ingredients, you are less likely to deliver your customers’ orders on time. Bear in mind that your customers have their own sets of customers to serve, too, and they want their orders to be shipped to them sooner not later. If you can’t deliver, that may affect your relationship with them and might force them to leave you and switch to a different, more reliable supplier.
Apart from that, lack of cash on hand also impacts your relationship with your staff. One of the effects of late payments and poor cash flow is the inability to pay your employees’ salaries on time. That will lead to heightened stress levels and worse, a drop in their morale. If this continues to happen, they may be left with no choice but to leave your business. And you won't get them working out a notice period if they're not getting paid!
Additionally, delays in payments make it difficult for you to prepare an accurate cash flow forecast. How can you plan an expense or an outgoing payment when you’re not even sure when will you receive your next incoming payments? Cash flow forecasting is important and is something you shouldn’t skip doing as it helps you make all the important decisions you need.
As you can see, late payments result in some serious cash flow problems. Atradius’ B2B payment practices survey looks at B2B payment behaviors, and it shows that unpaid invoices can have a heavy impact on a business’ cash flow.
“Unpaid invoices can have a serious impact on a businesses’ turnover or cash flow,” the report says. “Not only because non-payment by buyers costs a business time and money in respect to pursuing collection of debts, but also because bad debt reserves represent money that is unavailable for use in growing the business. In addition, the longer the receivables remain outstanding, the lower the likelihood of turning them into cash.”
The Government has also begun to focus onthe negative effects of Australia’s late payment culture and is now taking steps to combat this silent killer.
THE FEDERAL GOVERNMENT WANTS TO IMPLEMENT A NATIONAL PROMPT PAYMENT PROTOCOL
Over the last few years, the average time it takes for some large B2B businesses to settle their invoices was more than 50 days. But this behavior is no longer being tolerated.
In the latter months of 2017, the federal government proposed a national Prompt Payment Protocol in response to the Australian Small Business and Family Enterprise Ombudsman’s “Inquiry into Payment Terms and Practices” released in April 2017.
The said protocol will target the late payers and will encourage them to commit to paying on time. Eventually, it is expecting to see these businesses making prompt payments a normal practice. There are five principles of this protocol:
PAY ON TIME: Business suppliers must be paid on time within the agreed payment terms. Basically, the federal government wants businesses to receive full payment within 30 days.
COMMUNICATE EARLY: Come up with a clear payment terms contract and give clear guidance on procedures. If B2B companies won’t be able to pay their invoices within the agreed terms, they must provide a good reason.
ENCOURAGE GOOD RELATIONSHIPS: Encourage other businesses to apply the prompt payment protocol in their own supply chains.
ADOPT A COMPLAINT RESOLUTION PROCESS: Have a process for resolving complaints and disputes, and respond to these complaints as quickly as possible.
IDENTIFY YOURSELF AS A PROMPT PAYMENT LEADER: Be committed as well to paying businesses on time.
Ombudsman Kate Carnell has welcomed this move from the federal government. She even said the government indeed showed a willingness to lead by example. “This is a game changer for small businesses and family enterprises that provide goods and services to the Government,” she said. “Cash flow is king for small business and this will make a huge difference. It will save money on interest payments, boost confidence and free up capital for reinvestment.”
Carnell is one of many organisations that are pushing to end the late payment culture of Australians. Earlier in 2017, she called for legislation recommending the government to mandate a maximum payment term of 15 working days for government businesses and 30 days for large-sized private companies. Carnell said the long payment term that most businesses currently follow is damaging our economy. It not only results in poor cash flow for many small-sized businesses, it also leads to stress and business closures.
"When a business experiencing extended payment times is also hit with late payments, it stresses the business further, which can easily put them out of business," she explained.
Now with the federal government introducing a prompt payment protocol, Carnell hopes it will inspire other businesses to also make their move.
HOW CAN YOU PREVENT LATE PAYMENTS?
While the local government is taking steps to solve the major cause of poor cash flow, you can also do your part in preventing delayed payments. How? There are many ways, and below, we’ve put together some of the most effective.
Provide different payment methods
Sure, your customers are busy, which is the reason why they don’t always have the time to settle their invoices promptly. However, another possible reason they don’t pay you on time is they don’t see your payment options as flexible. Perhaps you’re only accepting cash or bank deposit/transfer, which isn’t convenient for your customers?
In this modern age where everyone follows a hectic schedule, you need to offer different payment methods to ensure your customers can get their payments in without the hassle. Some of the methods you could provide are Cash on Delivery (C.O.D), mobile and online payments, or payments through all major credit cards and debit cards.
Start accepting card and direct debit payments
Card payments are one of the most convenient payment methods for most B2B customers. As a matter of fact, these customers are more likely to do business with a supplier that allows them to use cards for transactions. Based on In Deloitte’s B2B Payments 2015 Australia and New Zealand Research, B2B customers rely on cards as their primary payment instruments because they are better, faster, and cheaper.
Direct debit payment is another option that these busy customers prefer. This method lets you charge your customers automatically so you never have to chase late payments again. It’s a bit complicated and time-consuming to set up so we always suggest you use a third-party service or an online payment platform that can process direct debit payments for you.
Manage your invoices
As much as possible, automate. Most of the time, delays in payments happen because your customers haven’t received their invoices yet, or you've missed their scheduled payment days. So it’s better that you automate your invoice sending to make your process “instant”. The idea is, the sooner you send your invoice, the sooner you’ll get paid. More than that, when you automate, you will also see your admin work and errors from manual data entry dramatically reduced. You can have peace of mind that your customers will receive nothing but a correct and accurate invoice.
How can you automate your invoice process? Again, technology is key. You could adopt a web-based accounting platform like Xero or an order management system like Ordermentum that can automatically generate invoices and send them to your customers. Other online tools can even notify you who hasn’t paid so you can chase them immediately instead of just waiting for them to place their payments.
Cash is king in any kind of enterprise. It is the indicator that shows whether your business has the power to survive in the next 5 to 6 years and it keeps you afloat on a daily basis. Hence, it is important that you keep an eye on one of the major factors that cause cash flow issues. Late payments, that is. Get rid of payment delays by automating your invoice process and providing multiple payment methods - including card and direct debit payments - to your customers. This way, not only will you improve your cash flow, you will also secure the future of your business.
Want to read more cash flow advice like this? Check out our blog.