Delayed payments have a detrimental impact on SMEs

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Gerrie van Biljon, executive director at Business Partners, says irregular or delayed flows of payments from customers continue to have a detrimental impact on the cash flow of South African SMEs, severely restricting opportunities for expansion and job creation.

Van Biljon says that the way in which a business manages its working capital and the speed of its cash conversion cycle ultimately impact its overall profitability. "Put simply, in order to produce and sell a product or service a business incurs costs including wages and raw materials, and if it doesn't receive payment during a certain time period for the product it has manufactured, or the service it has provided, the business cannot purchase new material, pay staff or overheads.

Devastating consequences

While payment delays can be easily absorbed by larger companies with easier access to credit, late payments could have potentially devastating consequences for SMEs. "The impact of late payments on an SME can often be similar to a worker only receiving half his salary at the end of the month, or no salary at all. Without payment, the ability to pay bills, buy stock and pay wages is compromised, and can often have disastrous long-term consequences.

"Cash resources are required to service a business owner's financial obligations. Cash flow is like oxygen to a business, so without access to cash a business will die, or at the very least, stop growing."

Local SME owners seem to acknowledge that late payment is an issue which they experience frequently, and were keen to know what type of strategies they can adopt to protect their businesses against this burden in future.

Van Biljon says that SMEs should always try to diversify their client base, so should one client not pay on time the business will still have incoming capital from other clients. He also advises that SME owners assess clients very carefully before selling products or services on credit. "Always ensure that they are credit worthy and will be able to pay for the product or services supplied."

Cash reserves

"Businesses should also attempt to have some cash reserves available, or access to capital in place should a client not pay on time. Always have a contingency plan in place, so if clients do withhold payment the business has capital to fall back on," he advises.

Cash flow management and the science of credit risk management is very specific and complicated, and SME owners should consult with a specialist or mentor should they not be sure of a way forward for their own business.

"As it is estimated that SMEs generate half of gross domestic product and nearly 60% of employment locally, it is key that business owners take charge for this concern as failure of small businesses could have devastating consequences for job creation in the country," Van Biljon concludes.