SA SMEs struggle with cash flow as a result of delayed payment

Irregular or delayed flows of payments from customers continue to have a detrimental impact on the cash flow of South African small and medium enterprises (SMEs), severely restricting opportunities for expansion and job creation.  This is according to Gerrie van Biljon, Executive Director at Business Partners Limited (BUSINESS/PARTNERS) - a risk finance company which finances and invests in SMEs.

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.

The most recent Business Partners Limited SME Index, which quarterly measures confidence levels amongst local businesses, found that South African business owners have average confidence levels of 62% that customers will pay them in the stipulated time frame – a 7% decrease compared to the previous quarter. 

Van Biljon explains that 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.

Gerrie van Biljon

“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.

“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.” 

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 (GDP) 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. 

Late payment Q&A:

Van Biljon provides some insight to the top questions entrepreneurs ask the BUSINESS/PARTNERS Entrepreneurs Growth Centre – a platform where entrepreneurs can contact experienced mentors to seek advice and assistance about their business.

Question: Who are the usual culprits that pay SMEs late? 
Big corporates & government departments are often guilty of not processing payments speedily. This is often due to intricate and bureaucratic payment processes and systems. 

Question: What advice can you offer SMEs struggling with late payment? 
Try as much as possible to sell products and services to clients on cash terms, this will reduce the amount of products sold on credit and reduce the risk of clients not paying in the stipulated time frame. Negotiate payment terms with customers buying on credit upfront and be decisive on what your terms of payment are – once you have decided on these payment terms be sure to enforce them across the entire client portfolio. 
Also ensure that your invoicing is done correctly, timeously and reflects all of your client’s guidelines and requirements - all the necessary information. This will reduce the back and forth and limit the time spent on the payment process. 

Question: As a business owner what steps can I take to protect my company against late payment repercussions?
Business owners should carefully model various scenarios that might result from the terms of payment you offer your customers and develop contingency plans in case the worst case scenario does present itself. They can also make use of bridging finance products should they find themselves in a difficult situation due to late payment. 

Entrepreneurs seeking guidance can contact the Entrepreneurs Growth Centre on 0861 SMEFIN (0861 763 346) or email enquiries@businesspartners.co.za