By Tracy Ewen, Managing Director, IGF Invoice Finance
There’s little doubt now that the UK economy is on the mend. The CBI’s latest Growth Indicator showed output volumes in the three months to February growing at their fastest pace since records began; the Office for National Statistics (ONS) has confirmed GDP grew strongly in the fourth quarter; and British Chambers of Commerce (BCC) said it expects the economy to finally match its 2008 peak in the second quarter.
In light of this, business investment was up 2.4 per cent in the final quarter of 2013, according to ONS figures, and 8.5 per cent higher than the same period in 2012.
Potholes in the road ahead
Although improving, the recovery is still fragile. For example, insolvency trade body R3 suggests 96,000 companies would currently be unable to repay their debts if interest rates rise.
Cashflow will be key to this recovery. The Association of Certified Chartered Accountants has long noted that poor cashflow management is among the main causes of small business failure, and recoveries tend to highlight any weaknesses. Sage Pay’s figures suggest small businesses are now owed £55 billion in unpaid invoices, and the problem is getting worse rather than better.
Although there is little that SMEs can do to address these broader issues, there are still some positive steps they can take in order to ensure that they are prepared for the road ahead.
Looking under the bonnet
The first thing to ask is whether SMEs are adding to these problems with inadequate systems for invoicing. It’s a particularly important question after five years of cost-cutting that has left some, particularly the smallest businesses, with no professional, dedicated book-keeping and sales ledger function.
Invoice errors such as incorrect trading names, a failure to clearly state due dates for payment, delays raising invoices after delivery, and reliance on paper and post, rather than electronic methods, all result in slower payment. These unnecessary delays put a strain on cashflow and increase financing costs.
A race to the horizon
SMEs need to ensure their desire for growth isn’t leaving their business vulnerable. The danger of overreaching is perhaps the key risk in a recovery.
Businesses are understandably flattered by big new orders, which are more likely as the economy improves. But revenue doesn’t deliver success; profit does. To ensure growth is sustainable, businesses must understand their customers’ businesses and their own.
For the former, this means having a firm grasp of customers’ ability to pay and applying and enforcing appropriate credit limits. Effective credit control and credit checks, as well as robust mechanisms for chasing late payments and ensuring, where necessary, proof of debts, remain essential. Indeed, as businesses look to acquire new customers, factors like these are more important than ever.
Demonstrated discipline in this area has the added advantage of making companies a more attractive prospect to lenders if they need finance to help them grow faster.
Filling up the tank
Businesses have to take a healthy approach to credit to fuel their growth.
High street lending to SMEs remains a problem, however, at least some of this lack of lending is actually down to businesses’ caution. There’s a reluctance to draw on even existing credit facilities, while fears persist that more bad news could still be coming. Businesses need to know that the type of finance they choose does make a difference.
For example, invoice finance provides funds in line with the value of invoices as they are issued, it deals with the problem of lengthening payment terms from big businesses and also allows SMEs to commit to big orders with confidence. It also includes credit checking services and can offer the option of bad debt insurance.
The traditional approach of taking on debt secured against property or material assets is often not the best option for small businesses, and seldom the only one. But external finance regularly has a role to play in addressing both of these areas and giving SMEs the freedom and confidence to drive on to better things.
Despite some of the pessimism that still exists, the growth prospects of UK businesses are great. Conducting a thorough MOT, understanding what a business needs to facilitate and support growth and where it can find those tools, will put companies in the driving seat, ready to capitalise on the recovery.