With help from the authorities, the payment issues of SMEs can be smoothed out for the benefit of all, including the wider economy. Image Credit: Shutterstock

The November edition of PYMNTS’ ‘B2B And Digital Payments Tracker’ revealed that 1 in 4 SMEs in the UK were impacted by cash flow challenges, while 94 per cent of British companies experienced at least one month of negative cashflow in 2021. And 56 per cent of UK SMEs expressed concern over late payment volumes growing.

The Xero Small Business Insights (XSBI) Program in its report ‘Crunch: Cashflow challenges facing small businesses’ reported 90 per cent of these enterprises face at least one negative cashflow crunch in a year. The report further reveals small businesses, on an average, are cashflow negative for 4.2 months in Australia, 4 months in New Zealand, and 4.5 months in the UK. Triggered by Covid, most SMEs experienced cashflow stress and spent much of 2020-21 navigating the consequent roadblocks.

It becomes imperative the payments ecosystem of SMEs supports effective cashflow management. To create a free-flowing payment landscape, the authorities in the UK require payment dates for B2B transactions to be completed within 60 days of the customer receiving an invoice, or within 60 days of receiving the goods or services. When it comes to public sector contracts in the UK, businesses must be paid no more than 30 days after invoicing or delivery.

Strict control on B2B payments

The UK government announced the launch of a review to assess the progress made in combating late payments by end of 2022. Identifying a similar challenge in Europe, the European Commission’s 2023 work program lists changing late business payment rules, among various other reforms, intended to provide economic relief. The Indian government requires the private sector to clear dues of MSMEs within 45 days along with the books of accounts filed with the Registrar of Companies which make mention of outstanding dues.

In the UAE, it is estimated that almost 60 per cent invoices are settled late. On an average it takes 40 plus days to process B2B payments which becomes more complex as different organisations manage payment cycles differently. If we think about it, small business owners in most countries are caught up in the vicious cycle of delayed payments, compounded by the outbreak of Covid and which continue to hinder their growth.

Most businesses begin with a limited amount of capital, and it is critical they maintain a healthy credit and revenue cycle to grow. Skewed cashflow management wields the power to derail the business from growth and expansion. Lack of a seamlessly flowing payment landscape causes friction in cashflow management, which in turn pushes businesses over the edge.

A cascading cashflow situation

The kickstart to a cashflow crisis creates a ripple effect within the business as it immediately impacts credit scores and which affect the chances of SMEs gaining access to banking finance. Once caught in this cycle, it is challenging for businesses to break the pattern. SMEs and their stakeholders are left with no choice but to turn the spotlight on firefighting cashflow challenges, and struggling to maintain healthy credit scores instead of using their efforts in expanding the business.

I wield a ringside view to the cashflow crisis that weighs businesses down. The way I see it, the solution lies in working collectively towards building a system where accountability and timeliness in payments are upheld by all the stakeholders involved. The first step in this direction would be transitioning from a lackadaisical mindset and adopting an empathetic approach towards cashflow management.

A shift of payment patterns within the business landscape will go a long way in bringing growth to businesses across all sizes and stature.