As small businesses grapple with the challenges of operating in a post-pandemic environment, a range of other factors such as late payments are also taking their toll on small business cash flow.
Late payments have a huge impact on small businesses, threatening their ability to do critical things like pay rent or wages on time, writes Colin Timmis, Xero South Africa Country Manager.
Late payments remain one of the top threats for small businesses. According to our Xero State of Small Business Report 2022, over a quarter of South African businesses are currently owed money in the form of late payments. And 45% of small businesses that are owed money are waiting for over R100,000 in late payments.
It’s disappointing those late payments continue to take a toll on livelihoods and the mental health of so many business owners.
We need small businesses to thrive in the future as they are the driver of growth in our wider economy. But this won’t happen unless more is done to reduce the burden of late payments. Nearly half (47%) of South African small business owners cite cash flow issues and late payments as two of the biggest obstacles to their growth.
At Xero, we’ve recommended a number of changes at the government level, including increasing the current R20,000 limit for claims to pass through the small claims court and introducing a bill that compels big businesses to release their payments data.
But these changes won’t happen overnight. So how can small businesses better manage cash flow? The good news is that there are some steps small businesses, and their accountants and bookkeepers can take to help reduce late payments and minimise cash flow risks.
Use digital solutions to manage your finances: Using cloud accounting platforms will make it much easier for you and your team to keep track of cash flow and manage your finances. This means you can collaborate with your accountant on things in real-time. You’ll also have a much clearer view of who owes you money and who are regular offenders when it comes to late payments.
Simplify payment processes: Using cloud accounting tools can also help small businesses get paid faster in a number of ways, including providing online payment options for customers on their invoices and setting up reminders that are automatically sent to customers when their invoices are overdue. These payment options can also include ‘pay now’ options to encourage more prompt payment.
Review your expenses: With inflation hitting record levels, now is the time to review your expenses and see where you can reduce your costs. Look for alternative suppliers that may be able to offer better prices; negotiate with your existing suppliers and ask for discounts for bulk purchases or early payments. You can also review your subscriptions and cancel any that you no longer need as well as review all variable costs such as advertising and marketing to make sure you’re getting an appropriate return on this investment.
Put together a budget: Work with your accountant or bookkeeper to put together a budget that allows you to predict cash flow and anticipate crunches so you can better plan for the difficult months. You can use tools like Xero’s Short-term Cash Flow or other apps that help you to project cash flow 7 or 30 days into the future. This is really helpful for forecasting, planning and identifying issues in your cashflow.
Consider funding to support cash flow shortfalls: Accessing the right working capital could help you to take control of cash flow and give you the confidence to take on opportunities when they arise. Platforms like Xero integrate with alternative lenders such as Bridgement and Retail Capital so that SMEs can take out a loan by sharing their financial data in a few clicks. These alternative lenders usually assess and make decisions quicker than traditional lenders.
Managing late payments: Open up an honest discussion with all your suppliers and all those who owe any outstanding payments on when they might realistically be in a position to pay you. Making a human connection and making sure they know that you’re a small business trying your hardest to stay afloat, increases the chances that you’ll get your invoice paid on time. It’s always good to set expectations upfront in new business relationships when it comes to payment times.