While the majority of business expenses leave a company’s bank account at fixed days throughout the month, the same cannot be said for income received. Debtors appear to be deciding to make payment for goods sold or services supplied when it is convenient for them. This is creating further distress for businesses that are already faced with high interest rates, energy costs and employees’ increasing expectations around pay.
New research by Spanish credit insurer Crédito y Caución has revealed that almost half of British companies expect their payments situations to worsen in the next 12 months. This is a significant cause for concern, given that businesses need cash just to operate on a business-as-usual basis, let alone grow. A debtor purposefully withholding cash is exacerbating existing cashflow problems for suppliers. While some businesses, notably SMEs, may see some light at the end of the tunnel now that inflation is easing, their investment intentions are likely to be scaled back as the cost of funding remains high and revenues from trading are still under pressure and remain at underwhelming levels.
The trickle down effect of moderate liquidity problems in larger companies is ultimately dramatic for smaller ones that don’t have a safety net or access to further funds. Poor cashflow will always be the biggest killer of businesses, particularly SMEs due to the inevitable cycle of owing one supplier in order to pay another. They too often are faced with the difficult combination of late settlement with suppliers and non-payment of corporation tax and/or VAT.
While so much is beyond the control of managers, they must make sure they exercise a firm stance when it comes to cash owed:
- Suitably robust contracts with clearly outlined payment terms and penalties, such as fines or interest charged, for late payments are crucial when work or goods are invoiced in arrears.
- Establish a robust, stepped policy for eventual legal action.
Suppliers to companies facing financial distress must have the confidence to enforce the payment terms agreed with those companies and to chase any late payments regardless of the perceived risk of upsetting a customer. If a business agreement cannot withstand discussions around monies owed then the inevitable consequence will be bad debt and a loss of goodwill moving forward.
For those businesses already facing significant challenges from poor cashflow, managers can’t afford to take a passive stance. They must take action sooner rather than later to try to keep their businesses afloat and, in particular, stay on the right side of HMRC. There are several positive steps at their disposal:
- Initiate an open dialogue with HMRC to ascertain payment options available and establish a plan which ensures that payments are made without putting the business in jeopardy. Being unresponsive will aggravate HMRC and hasten a winding up petition.
- Look at extending credit terms. Revisit repayment profiles for loans and propose realistic, achievable amendments. A loan that remains serviced, albeit differently, is still profitable for a lender.
- Consider the moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission. While any restructuring measures have negative associations for many businesses, they can provide a valuable break in demands from creditors and is not something to dismiss.
All businesses facing severe cashflow pressures should seek professional advice on credit management, invoice discounting, overdraft planning, communicating with HMRC and contractual terms to minimise the impact of late payments.
Written by Alice Fanner, Assistant Manager at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.