Cash is king for Ireland’s SMEs, but right now it’s under royal pressure. Inflation, interest rate rises, the energy crisis, and supply issues are all putting pressure on costs, with fears of a rise in late payments not far behind.
“The inflationary environment is having a direct impact on the payment cycle through an increase in costs such as inventory, interest, wages and fuel, which businesses are not always in a position to pass on to its customers,” explains David Ahearn, director, corporate finance in KPMG’s Cork office.
Revenues have been impacted by a number of factors including disruption in the supply chain, which leads to delays in the securing of inventory required to generate sales in a timely manner, he points out. “The rise in the cost of living could lead to a reduction in consumer demand, which in turn would result in lower sales. This can then create a wider knock-on effect in the wider economy as businesses impacted with cash flow restraints can be then slower to make payments to other businesses, which can then place those business under cashflow pressure.”
So what can businesses do?
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“Every small and medium-sized business (SME) should calculate a cashflow statement and forecast, identifying what the cash needs of the business are. These will typically include fixed costs, such as rent, insurance, telephone and broadband services, and variable costs including taxes, PRSI and operational expenses,” says Stephen McCarthy, head of business development at Bibby Financial Services.
“Having a forecast will allow you to more easily see where potential savings can be made, such as by reducing or postponing non-essential services. It’s advisable to create a new cashflow plan every month or at least quarterly, depending on your circumstances, and this will help better control cashflow.”
Consider your customers’ and suppliers’ own financial position as well. The Covid-19 pandemic and the energy crisis has meant that many businesses are experiencing payment delays, and this inevitably has knock-on effects throughout the wider supply chain as the cash conversion cycle lengthens, Mr McCarthy points out.
If possible, maintain diversity across your customer base. This may be easier said than done, he admits, especially as the full effects of the energy crisis on businesses’ ability to operate begins to be felt, “but ensuring a wide customer base will limit your exposure to bad debt and enhance cashflow,” says Mr McCarthy, who recommends not having more than 20 per cent of your business with one customer, as losing that business would represent a sizeable hit to your income.
The non-bank lending sector has proliferated here since the financial crisis. The upshot for SMEs is that there are now more alternatives to traditional bank finance than ever.
Many, such as Bibby, specialise in products such as invoice finance, which allows businesses to raise cash against unpaid invoices, providing an immediate and ongoing supply of cash that grows with a business. Up to 90 per cent of the value of an invoice can be paid within 24 hours – allowing business owners to pay staff, suppliers, or take on new orders. “Because it is not a loan, it doesn’t involve any additional debt, helping to keep cashflow healthy. Equally, unlike taking out a business loan, there are no fixed monthly repayments involved,” says Mr McCarthy.
“Ultimately, improving your business’s cashflow is a crucial step in surviving and thriving, allowing you to realise new opportunities, take on new orders or expand and invest in your business.”
According to Ciaran McAreavey, managing director of Close Brothers, in the current environment many businesses are facing the challenge of their suppliers seeking payment in advance or reducing credit terms.
“Furthermore, lead time from suppliers is increasing, requiring many businesses to move away from a “just in time model” to a “just in case model” and pushing up inventory levels. This is being exacerbated by their own customers taking longer to pay. All of this results in more of the business’s capital being tied up in working capital assets – that is, increased debtors and inventory without the corresponding offset of increased creditor finance. Many businesses find themselves asset rich but cash poor, resulting in liquidity challenges even if the business is trading profitably,” cautions Mr McAreavey.
Invoice finance can release capital tied up in debtors. “Unlike a traditional overdraft this type of funding grows in line with turnover, which can increase due to the impact of inflation on selling prices as well as increased activity,” he points out.
Invoice finance suits most businesses which sell goods or services on credit terms. “Asset based lending products further extend invoice finance with funds released against other business assets such as plant and machinery, inventory and property,” adds Mr McAreavey.
