How SMEs can tackle late payments in 2020

Source: © Clarissa Leahy via www.gettyimages.com

It’s no surprise, then, that recent Xero research of over 500 SMEs found that cash flow and late payments were the number one concerns for SMEs.

The report, titled “The State of Late Payments in South Africa,” also found that an astonishing 91% of SMEs experienced late payments on their invoices over the past year. SMEs are currently owed, on average, R99,801 at any given time. This equates to a staggering R249.5bn nationally. *

How late payments disrupt cash flow

Late payments are one of the major causes of cash flow problems. When combined with other irregularities like holidays and tax deadlines, late payments can put businesses precariously close to the red. Beyond that, companies that are waiting on payments will have a harder time processing and making decisions and risk passing on the problem of late payments if they are unable to pay their suppliers on time too.

According to the report, one in five South African businesses struggled to pay for critical services, suppliers, and staff because of late payments. Almost 20% struggled to invest in growth and innovation, while 17% had to declare bankruptcy.

The South African economy needs small businesses to succeed. That’s why several prominent role players established a late payments task force, to get insights about what small businesses in South Africa can do to stay on top of cash flow.

The experts on the task force are Louw Barnardt, co-founder and managing director of Outsourced; Colin Timmis, country manager at Xero; Jeanne Viljoen, project director, Practices at SAICA; and Damian Baker, manager of Business Process Solutions at SNG Grant Thornton.

Here’s what the experts have to say:

Start as you mean to go on

Damian Baker, SNG Grant Thornton, comments: "Delayed payments have a direct impact on your working capital and can severely constrain growth capacity. That’s why it’s crucial to set out your payment terms, invoicing dates, and due dates in contracts from day one to eliminate ambiguity".

"Once you’ve established the ground rules, it also helps to send your invoices promptly, as the sooner you invoice, the sooner settlement could be received. If you’re having persistent problems, consider implementing interest charges or setting up a monthly debit order."

Relationship building

"Working closely with the accounts departments of the companies you’re invoicing can ensure prompt payment. Make sure that they are familiar with your payment terms and know how to reach you with any questions. If you build a strong enough relationship, they might even work towards speeding up turnaround.

Differentiating between primary and secondary contacts is also crucial, as is learning your customers’ payment cycles. Ask them whether they want to be invoiced 100% upfront since this can make their life easier if they’re working through an allocated budget.

It's also important to conduct a credit check on prospective clients. Companies and suppliers with bad credit histories might be liable to pay late in the future advises Colin Timmis of Xero

Develop a comprehensive cash flow strategy

Louw Barnardt, Outsourced CFO adds "Cash flow is often misunderstood as a simple matter of being ‘in the red’ or ‘in the black’. In reality, it is far more complicated, and that’s why businesses need a comprehensive cash flow strategy.

In short, this is about managing ebbs and flows: making sure you have enough staff to make the most of spike periods, and knowing how to upsell customers, bring them back, and get by during downtimes. A reorganisation of staff schedules at the right moment or a strategic promotional sale can make all the difference."

Choose smart accounting technology

"Modern accounting software offers greater visibility of your numbers and makes it simple to manage your finances, all while being more affordable – and beautiful – than previous solutions. What many don’t know is that it can also be a powerful tool in helping you to avoid late payments by sending out invoices in bulk and automatically tracking payments. Embracing technology means that businesses will be able to spend less time on troublesome administrative tasks and more time on growth," comments Jeanne Viljoen, SAICA.

Taking on late payments in 2020

Getting paid for your hard work should never be a chore, so let’s put an end to late payments in the year ahead. The key to dealing with the uncertainty we face in South Africa is to focus on what you can control and working to improve your cash flow wherever possible.

This means working with your accountant, sourcing the right tools, creating clear deadlines and understanding and preparing for cash flow fluctuations. When you can stop worrying about administrative concerns like payments, you can start focusing your energy on what really matters for your business.

*Calculated by multiplying the estimated number of SMEs in SA (2.5 million) by R99, 801 (the average amount in late payments owed to SMEs at any given time). This amounts to R249.5 billion