Small businesses need to be more savvy with their cashflow management

New research shows that the UK's small companies are being hit by the double threat of suppliers billing quicker and clients paying late. It is a good time for businesses to review the way they operate to ensure success during an economic slowdown.

Research from HSBC Commercial Bank found that one in five (18%) small businesses reported suppliers are billing quicker and a further 20% said that fewer companies are paying within agreed payment terms. This research follows figures from the Federation of Small Businesses showing that large firms are delaying invoice payments to smaller firms.

According to the survey of senior decision makers in 596 small and medium-sized companies, many SMEs are overly reliant on their savings and overdraft to fund cashflow, big purchases and business investment. It found 40% of SMEs are raiding savings and 24% relying on overdrafts to manage their everyday finances. While 18% used their overdraft to fund big purchases, such as business vehicles and equipment, with 11% turning to their credit card for business investment.

The research found that one in 10 are already using invoice finance to actively manage their cashflow while 9% are using leasing finance to help capitalise on their assets.

Here are some selected tips from HSBC to help small businesses with forward planning and risk assessment:

Forward planning with your cashflow

Do - keep cashflow budgets up to date, focus on receiving payment for sales, avoid unnecessary or excessive expenditure, and arrange appropriate financing before you need it.

Do not - assume payments will be received on time, tie up excessive cash in working capital, and overtrade by accepting orders you cannot finance.

Taking control of your budget

Do - focus on key indicators which have a significant effect on performance, use budgets to anticipate problems, regularly review performance and find reasons for variances, use budget control as a prompt to action, and revise budgets as more up-to-date information becomes available.

Do not - confuse changes in timing with permanent changes to the levels of income or expenditure and ignore favourable variances without finding an explanation.

Managing debt risks

Do - chase debts as soon as they become due, try to resolve the problem if there is a genuine dispute, use firm but friendly telephone calls, keep records of everything that is said, and who you are dealing with.

Do not - accept excuses at face value without establishing what will happen next, offer further credit to customers who are not paying, take legal action if the debtor is unlikely to be able to pay.

Making large business purchases:

Do - consider all the funding options – leasing, HP, loans and mortgages

Do not -tie up your personal wealth and overdrafts making long term purchases, use asset finance options instead and free up your overdrafts etc for short term requirements