Cash flow Clouds Loom Ominously Over Small Business
Credit agency Dun & Bradstreet has delivered a blunt warning to SMEs about the patchy state of the economic recovery and now has 36,000 firms rated as being at “high risk” failure over the next 12 months.
The majority of firms at risk are small and have traded for less than four years.
D&B’s director of corporate affairs Damian Karmelich, says cashflow will account for 80-90% of collapses.
Karmelich says that as conditions improve and orders pick up, companies need to spend money to increase production and fulfill those orders.
However, they then must typically wait almost 60 days after the order is shipped to get paid.
“What you find is that you have a period of negative cashflow, and it’s that negative cashflow that causes the moment of crisis,” Karmelich says.
Leigh Dunsford, operations manager AR Cash Flow, agrees with Karmelich and contends that many SMEs get their timing wrong. “Most (SMEs) are of the mindset that they can’t afford to start a new job until they’ve been paid for the last. What happens in the interim is that they knock jobs back that simply may not be there when they’re cashed-up,” he said.
D&B’s warning rides on the back of the latest SensisR data which contends that SMEs perceived cashflow as the number 1 problem facing them over the next 6 months.
Further to this, Smart Company’s James Thomson, yesterday mooted the problem of debtors days when posing the question: “It’s not just, can this firm pay my bill, it’s will they pay in a timely manner?”
Leigh Dunsford says: “If an SME has credit worthy debtors, we can provide them funding within 24 hours, but it’s what they do with the cash that determines their long-term viability.”
“Some (short-term) clients ‘raid the candy store.” The smart ones reinvest only what they need to meet fixed costs like wages or to purchase materials for new jobs…they don’t fritter future earnings away,” said Dunsford.
Dunsford recommends that SMEs should “shop around” when sourcing alternate avenues of funding.