Why Cash and Cash Flow are Changing, Quickly

Why are cash and cashflow changing? The oldest phrase in business is that cash is king. That has never changed. What has changed is that for the average business cash flow is quickly becoming life and death, no delays, no hesitation. The impact is quicker and deeper than it has ever been. This statement is […]

October 21st, 2018

Why are cash and cashflow changing?

The oldest phrase in business is that cash is king. That has never changed. What has changed is that for the average business cash flow is quickly becoming life and death, no delays, no hesitation. The impact is quicker and deeper than it has ever been.

This statement is based on statistics provided by Creditsafe following an analysis of invoice payment terms.

Why this impacts the average business hardest is due to the late payment and default on invoices when you look at the real payment timescales and level of invoice.

Let me explain.

Days Beyond Terms

Days beyond terms (DBT) looks at how long after due date is an invoice actually paid. This isn’t how long it takes for an invoice to be paid, it is how long after the agreed terms it is paid.

What the statistics show is;

The peak is for invoices between £10k and £20k where DBT hits 25 days

For the average small business a hole in cash flow of £20k for 25 days, let’s call it a month is massive. If that same business has two or three invoices outstanding then the cash flow gap hits £60k for a month. If you further add in 30 day payment terms then the cash flow gap is £120k on a rolling basis. Ouch.

Remember also that this is an average, some invoices will be paid even later.

The second statistic worth looking at is which industries see the greatest DBT impact;

Ignoring Utilities then Retail and Construction are the stand out sectors. These categories are ‘catch all’ meaning that ‘construction’ includes smaller suppliers, builders and ancillary sectors within the overall ‘construction’ sector. The same applies to retail.

This means a lot of average businesses sit within the highest risk of seeing late payment and the biggest impact in terms of invoice value.

Any Ideas?

The biggest problem I see is that businesses seek to resolve cashflow too late. The best time to raise finance or solve a funding issue is before it happens or when you don’t need to do it.

The other issue I see is that some businesses will look to raise finance against an invoice when that invoice is already deemed higher risk. The quandary is that borrowers want to raise against an invoice because it is higher risk or late being paid, the lender doesn’t like the invoice for the very same reasons.

The key is in getting reserve funding in place and keeping it for when required. The statistics show that the average business needs to be better prepared and more conscious of where their debtor book is what value it really carries.

For ideas on how to solve commercial funding then get in touch.

By Dave Farmer

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.