Today’s economic and political environment places a number of challenges upon entrepreneurs and small businesses growth. One of the most prominent is uncertainty – and the impact this has over the cost of doing business.
This has the potential to affect the ability of businesses to access finance, invest, export, and ultimately, grow. Consequently, the provision of tailored guidance and business support plays a vital role towards shaping the prospects of small businesses at an individual as well as the wider growth prospects of the South African economy as a whole.
Chartered accountants play an equally important role in this regard. Research indicates they remain entrepreneurs and SMEs’ most trusted advisors, with half of those small companies in the UK that have sought business support having approached their accountant. And as one of the largest accounting professional bodies in the world, we at ACCA have a birds-eye view of the key issues affecting SME business performance.
Problem of poor payment practise
Perhaps one of the biggest problems we hear about from small businesses and entrepreneurs is poor payment practice. Delayed payment affects businesses in a number of ways.
Evidence clearly shows that it reduces business productivity, with businesses that would otherwise be spending time growing and investing in their business instead chasing debts owed to them and being a substantial distraction to business staff.
Part of the reason for this is because small businesses suffer from a lack of bargaining power when dealing with established businesses and government because they do not have the resources (time, labour or capital) to dedicate to dealing with relevant disputes.
Typically, in a small business, all resources are focused on growing and sustaining the business and in particular, maintaining cash flow. Further resource is targeted at meeting key legal requirements, such as paying tax or regulatory compliance.
Small companies are, therefore, often relatively unsophisticated when dealing with contractual issues and no better able to protect themselves than individual consumers.
Both for small businesses and the South African economy, this is unacceptable practise. The knock – on effect results in potential job losses, unsustainable businesses and might in the long term translate the SME sector as a weak contributor to economic growth, increase barrier to entry and thus reduced competition in sectors where the late payment is rife.
At the moment, poor payment practice is not taken seriously enough in the boardrooms of larger companies. Given the impact of poor payment practices by large companies on smaller ones, it is essential late payment becomes a central focus for policymakers going forward.
Suppliers can protect themselves through careful due diligence and in-depth receivables analyses building on ageing debtors reports. They can make more realistic
provisions for bad debt, informed by first-hand information gathering, and incorporate these into regular cash projections. There is also a lot that they can do to improve the administration of receivables, from better understanding of customers’ systems and the use of automation to bringing in outside expertise on credit control and collections.
For suppliers, the fight against late payments continues with contract design: Businesses should ensure that their terms of credit are clear and explicit and that contracts give them appropriate rights over goods that remain unpaid for, as well as the right to withhold services or delivery as appropriate. Even the methods of payment can make a significant difference and must be specified in advance.
In addition, despite receiving very unfavourable press coverage, prompt or early payment discounts can be an acceptable means of aligning prices with the cost of servicing individual customers – as long as they are not imposed unilaterally and at short notice. Managing early payment discounts is easily managed in QuickBooks.
Financing and liquidity insurance is a major element of the fight against late payment, and small suppliers in particular need to replicate to the extent possible the protection provided by the internal cash pools of diversified business groups.
Exploring and securing alternative sources of finance (including factoring and trade credit insurance) is important, but ultimately directors must be alive to the implications of providing credit to major suppliers and be willing to take on some risk through equity injections.
Finally, suppliers need to be able to distinguish quickly between late payment and genuine credit risk. There is often no substitute for first-hand inspection and probing. When customers are struggling but ultimately viable, forbearance can work.
Businesses should seek to shield themselves from further cash disruption and reduce services to struggling customers but should also use payment plans to maximise recoveries and help customers surmount their problems.