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Smart tech to help SMEs take on late payments

By COLIN TIMMIS, Xero SA country manager

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Small businesses are doing all they can to keep their doors open amidst the current pandemic. They are the lifeblood of the economy – accounting for roughly half (47%) of South Africa’s workforce and constituting more than 20% of the country’s GDP. The reality is the impact of covid-19 on the economy is not over yet, and SMEs will need all the help they can get to rebuild.

To protect as many businesses from defaulting as possible, we need to focus on two common reasons why businesses go under: late payments and cash flow issues. Our 2019 State of Late Payments Report found that 91% of South African SMEs are owed money outside their payment terms at any given time. The average SME loses 89.5 working hours per year chasing late payments – the equivalent of two working weeks.

These numbers represent the dire state of late payments even before the widespread uncertainty brought about by covid-19. As a response to the data we gathered, we formed a Late Payments Task Force, who provided some advice for businesses trying to stay on top of their cash flow and get paid on time.

Taking on late payments

1.   Communication is key

Covid-19 has affected pretty much every business, and many will be in a state of hardship. To limit potential issues, reach out to customers and clients early to understand their situation. Making a human connection and making sure they know that you’re a small business trying your hardest to stay afloat and increases the chances that you’ll get your invoice paid on time.

2.   Incentives and disincentives

Late payment charges or interest are great ways to show that you’re serious about getting paid on time, while small early payment discounts – especially at a time when money is tight for everyone – can encourage clients to pay in advance. Consider credit checking prospective clients. A bad credit history could indicate issues. 

3.   Invoice early

The earlier you can get an invoice to a client or customer, the less of an excuse they have for returning it late. Consider agreeing on a recurring debit order payment on the first or 15th of the month and make the most of your cloud accounting tool’s bulk invoice feature. Accounting technology like Xero also lets you set expected payment dates and track payments, returns and credits and send automatic reminders so you can save time chasing.

Improving your cash flow

1.   Build a comprehensive cash flow strategy

It’s more important than ever for businesses to have an up-to-date view of their cash flow so they can plan, forecast and make the right decisions about their future. Using the right technology to do this will be critical in helping businesses recover. Being able to track cash flow in real-time and see money coming in and out of your business on a weekly basis, will give you a solid foundation to work from.

2.   Prepare a cash flow forecast

A cash flow forecast is a financial tool for estimating how your business will perform in a select period. Although times are uncertain, it’s worth setting up near- and mid-term forecasts.

To generate a simple forecast, begin by considering revenue. Many SMEs are bringing in less than they would otherwise, so try to extrapolate from customer buying trends to come up with an estimate of how much your business will bring in over the coming months.

Next, consider your expenses. Calculate how much money leaves the business in a typical month – and how much has been leaving during a typical month in lockdown. This is the time to ask yourself difficult questions about how much of a drop in sales you can sustain.

Xero’s recently launched Short-term Cash Flow is a great tool for this. It projects bank balances 30 days into the future, showing the impact of existing bills and invoices if they’re paid on time. This helps business to accurately scenario plan and make changes to business plans instantly.

3. Use smart technology to minimise disruption

As well as making it easier to track the health of your business, technology can also make it easier to apply for funding. Platforms like Xero integrate with alternative lenders such as Bridgement and Retail Capital so that SMEs can share their financial data and take out a loan in a few clicks. These alternative lenders usually assess and make decisions quicker than traditional lenders, which is helpful for businesses needing capital quickly.

If your business can operate remotely, cloud platforms will also make it easier for anyone in the team to keep track of cash flow. Multiple people in the business, as well as your accountant, can simultaneously review your company’s numbers from anywhere.

The path forward

Late payments and poor cash flow are damaging to businesses under normal circumstances, but these issues are becoming make or break for SMEs at the moment. While the government support and stimulus packages are welcome, we need to begin looking for long-term, sustainable solutions – and that means tackling late payments and ensuring that all SMEs have a stable cash flow.

At Xero, we have put together free training videos and resources to help. Visit the Business Continuity Hub to learn more.

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