EOW Reflections 17/11/2023

Imagine this: It’s the last Friday of the month and everyone’s been paid.  Christmas orders are being sent off on time and everyone’s been working at full capacity. You should be going off for a well-deserved relaxing weekend but you’re too depressed to go home. There are some alarmingly big invoices outstanding despite having chased them up, more than once. The awful reality is that, though the order book is full, the coffers are empty. The cashflow isn’t flowing and you can’t take home a salary to keep your own household lights on, without tipping over into the red.

Research from Xero this week shows that two in five small business owners are in that position, a third are using personal money to keep things ticking over, half are worrying about their financial situation and a tenth are in serious difficulty.

It’s desperately sad when talented, creative, innovative small business owners are struggling with cashflow issues, but I can’t say I’m surprised by the figures. I’ve been working with small businesses since the beginning of my career and this is the worst situation I’ve seen since then, in the early 1990s. Cashflow issues don’t just cause the bank statement to turn red. They cause business and personal debt, poor physical and mental health, relationship breakdown and homelessness. They also ripple outwards to everyone else and trickle down to families and communities.

Not all cashflow problems are caused by overdue payments. There are other pain points but not getting the money owed when you expect it to come in certainly is one of the main bottlenecks. Many owners firmly believe that if they just wait rather than chasing, the money will eventually be forthcoming, but it could come too late. If you can borrow or use invoice financing that may tide you over, but that means there’s more money going out than you’d planned for, unless you priced that cost in from the beginning. You may find though, as many small businesses are telling us, that it’s impossible to borrow and the only option on offer is an overdraft. Many have maxed out overdrafts and cards. They’ve also been subbed by the household budget and borrowed from friends and family, who can no longer afford to help. By the time the awaited payments come in the damage has been done.

I was struck this week by a post from someone in the construction sector reflecting on the demise of a firm owning large amounts to suppliers. He said he was one of the lucky ones because he’d been keeping a close eye on his big customer, done his due diligence and recognised signs of trouble (payments getting later and longer payment periods offered) so he’d chased up his overdue payments persistently and often. He’d been paid just before the ship sank. His message was: have a system for keeping on top of your cashflow so you can see where gaps might emerge and plug them before the situation gets critical. Hard as it is to do, chase early and often, keep an eye out for changes in payment patterns and act fast.

There are some great tech tools that help with cashflow management and forecasting.

And I’d add: try to build a good working relationship with the person who makes the payments so they feel bad about going home for the weekend without paying you. The last thing you need for the business, your own wellbeing and for your family and employees is to be struggling to pay yourself a salary.