Making sure bills are paid on time is absolutely critical for any business wanting to improve cash flow and strengthen the balance sheet, explains Warwick Haycock, accounting software specialist, Access Group

SMEs are the backbone of the UK economy, accounting for three fifths of employment and around half of turnover in the UK private sector. According to the Federation of Small Businesses (FSB), 17% of SMEs in the country are at risk of going out of business in the next four years.

The widespread disruption caused by the pandemic only underlined the importance of working efficiently to keep the wheels turning, but when payments are put on hold and the money begins to run dry, how are small businesses in particular expected to stay afloat?

While some businesses saw costs rise due to new infection control measures and staff sickness, other companies suddenly benefitted from reduced running costs and expenses bills as thousands of workforces across the country had no choice but to turn to remote working environments.

The pandemic has had a significant impact on how businesses, in any sector, operate, and the uncertainty of the situation will have undoubtedly meant sleepless nights over cash flow.  This is illustrated by FSB reports revealing that 62% of small businesses had seen an increase in late payments or had pay frozen completely due to the pandemic.

Finance teams will have faced the headache of figuring out just where their next payment was going to come from, with many customers experiencing their own cash flow problems or – understandably – intentionally delaying payments to hold onto money for longer.

While this scenario is not ideal for any party, late payments can be extremely damaging for small businesses who rely on healthy cash flow to be able to operate month-to-month.

Digitise to stabilise

The problems SMEs are facing can be fixed. In fact, experts believe that if every business is paid on time, it could unlock between £40bn and £60bn of additional revenue for small businesses. These are life-changing funds that could, without a doubt, secure the future of many struggling SMEs.

The adoption of technology can also hold the key towards unlocking healthy payment terms and securing better relationships with trusted suppliers.

A recent report, Striving to Thrive: the state of play for micro and small businesses, highlights just how important it is for small businesses to digitise, revealing that 41% of SMEs might not have survived the pandemic without the right technology.

Our survey of finance professionals also emphasised how crucial transformative software is for fundamental departments like the finance team, which have seen their responsibilities change significantly over the course of the pandemic.

If you are an SME and experiencing challenges with getting paid on time, I’ve shared my top three tips to help you encourage better practices through technology and more.

Tip 1: complete a thorough credit check

First thing’s first, start with a background check of your supplier’s financial situation and assess any potential risk through a thorough credit check. Before committing to work with them, you need to know that you are in safe hands and guarantee that you will not land yourself in financial hot water further down the line.

Doing a quick check will reveal whether or not they have a bad payment history, have been subject to County Court Judgements (CCJs) or are struggling with debt. Your report of the situation will help you to weigh up the risks and rewards of partnering and provide a clear picture of whether you should or should not enter into business with them.

Don’t just stop there. It’s good practice to credit check any existing customers you have on board too, even if you have been working with them for a number of years. As we know, circumstances can change at any time and particularly during a period of economic uncertainty, being aware of what is going on behind the scenes might help you avoid any future surprises. Obtaining a financial health check is the best way to safeguard your organisation.

We know many of our customers can often have a long list of partners all working to keep the business moving so the process of checking each of their credit backgrounds could be a lengthy process. To speed up the process, look for invoicing or accounting software with in-built credit control features as standard – this will run credit checks automatically, highlighting any cause for concern and enabling your finance teams to crack on with other value-adding tasks.

Tip 2: hone your relationships

As with anything in life, challenging situations can be made easier through good communication. That much can be said for business, too – effective and open two-way communication is at the heart of any strong business relationship.

Customers in financial difficulty are more likely to approach you about any cash flow difficulties if you foster a good relationship with them, based on empathy and understanding. It may even be worthwhile for your accountant or finance team to have a direct relationship with your partners, to be able to have open and honest conversations.

If an extension or alteration to payment terms are needed, in order to counteract any challenges they are facing, then it is often easier to come to a resolution that works for both parties.

When using software to complete the manual processes in your business, such as reconciling invoices or sales order processes, your team will have more time to spend nurturing strong relationships, helping you to navigate any difficult situations better.

Tip 3: embrace automation

In our day-to-day lives, we are surrounded by automation and technology and it is often surprising when we find this is not always the case in every workplace. There are a number of businesses still relying on outdated, legacy systems for their financial management. But now more than ever, efficiency in business is becoming a critical solution to recovery and, in the long-term, success.

Automated software systems, including producing reports, controlling costs and purchase and sales tools that can help to minimise the amount of manual processes needed to complete a task, are paramount in today’s landscape. With businesses trying to manage cash flow shortages, they could be at risk of losing more funds by not investing in their digital tools as competitors advance.

These tools have the ability to speed processes up and allow teams to access work remotely through the cloud, reduce the risk of human error and can also reveal powerful insights, thanks to the increased data analysis happening in near real-time.

Automated invoice processing software can approve payment of invoices instantly, providing they meet the specified criteria, without input from the team. They are also issued promptly to reduce the risk of late payments and staff will be automatically alerted to anyone who might not meet their payment terms.

Right now, small businesses should be focusing their attention on ensuring they have a regular flow of cash into the business and taking all the necessary steps to guarantee the security of the firm. Automated finance and accounting software will help to reduce cash flow problems and, best of all, increase your chances of getting paid on time.