Cash flow concerns grow for UK firms as late payments bite

Nearly a third (29 per cent) of small and medium sized companies (SMEs) reported cash flow problems in the second half of 2008, with 70 per cent citing late payment of invoices as the primary factor, according to research by Lloyds TSB Commercial.

The figure, taken from the bank's Business in Britain survey, represents an eight per cent increase on the same period last year but is still well below the peak of 56 per cent reached in the recession of the early 1990s.

70 per cent of companies who reported cash flow problems blamed late payment of invoices by their customers, as a growing number of firms stretch their credit terms and hold onto cash.

Business in Britain polls over 3,400 UK firms, the majority of which have a turnover under £15million.

The study found that firms in the wholesale and distribution and construction industries were most likely to suffer from late payments (83 and 80 per cent respectively) whilst businesses in the hotel, catering and leisure industries faired comparatively well with just 32 per cent blaming late payment.

Lloyds TSB Commercial Finance, the bank's asset based lending division which provides facilities designed to strengthen cash flow, says the problem is likely to worsen in 2009 as an increasing number of UK firms feel the effects of the economic downturn.

Simon Featherstone, managing director of Commercial Finance, said: "The research shows that late payments were already negatively impacting cash flows in the second half of 2008.

"With economic conditions remaining tough, it's vital that businesses examine where the threats lie and look at ways and means of strengthening their cash flow going forward.

"It's no surprise that we're seeing a rise in the number of businesses enquiring about products such as factoring and invoice discounting. These forms of finance enable businesses to release the value held in assets, such as invoices, machinery or stock, to quickly strengthen cash flow.

"The use of debtor insurance policies is also on the increase as businesses look to protect themselves from the worst effects of customer insolvencies."

Top cash flow tips from Lloyds TSB Commercial Finance:

Keep a close eye on what you are owed. If the amount customers owe you is growing faster than sales, it could indicate a credit control issue. Where there are doubts about being paid, make sure you adjust the balance sheet accordingly to ensure you maintain an accurate picture of cash flow. Taking out debtor (or credit) insurance is a means of protecting yourself against non-payment.

Check your terms and conditions. Having a clear set of terms and conditions helps to limit your liabilities, protect you from late or non-payment and provide security. It's important to ensure customers know where they stand from the start so be upfront with your ‘Ts and Cs'.

Don't be afraid to chase debtors. Remember that the majority of customers will respect you if you approach them politely and professionally to get what you are owed.

Trying to spread risk as much as you possibly can. Avoid becoming too dependent upon a small number of customers and see if you can negotiate part payment in advance for big jobs. If you are concerned about a particular contract, consider taking out insurance for all trade with that customer or against individual invoices.

Establish a close working relationship with your funder. The earlier they are informed about concerns or an issue, the more likely it is that they will be able to help manage any difficulties. A close relationship also means a business can pick a bank manager's brains about other sources of help and contacts - be it specialists divisions within the bank or other professionals in the local community.

More information is available in a free guide to ABL which can be downloaded from: ltsbcf.co.uk/guidetoabl/