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Top 7 threats to your SME clients’ cashflow

38% of small and medium-sized businesses (SMEs) have experienced cashflow issues in the past two years, according to research by Amicus Commercial Finance.

With cashflow one of the major causes of business failure globally, your role as a trusted accounting adviser is to help your SME clients to avoid the threat of negative cashflow – and reduce the impact that a poor cash pipeline could have on the short, medium and long-term prospect of their company.

Being proactive about improving client’s cashflow is extremely valuable, but you also need to help them identify the cash threats – and plan to avoid them.

Here are the top 7 cashflow threats you should be talking about with your SME clients.

1. An over-reliance on payment from one key customer

If a business is reliant on one or two key customers this puts all of their income eggs in the one revenue basket – and this can pose a real threat to your client’s cash position

If a high percentage of your client’s income comes from the sales generated by one single customer, the loss of that customer could be significant. Think about what would happen to revenues if the client lost that customer, or the impact on credit risk and unpaid debt if their lone customer’s business went bust.

Some key ways to reduce this threat would include:

  • Increasing their customer base – to spread the risk across a greater number of customers, while also reducing the reliance on their preferred key customers.
  • Review clients’ process for taking on large clients – and help them to think through the cash implications of big deals as well as whether the deal is profitable.
  • Get clients paid up front – and have initial upfront payments included in their proposal documents and contracts, so their customers know when and how they must pay.

Negotiating for upfront payments is one critical way to ensure you’re not left out of pocket, as Paul Bulpitt, co-founder of The Wow Company explains:

“Some of the biggest challenges our clients face is slow payment and financing big, complex projects prior to payment. To reduce this risk, don’t make payment terms any longer than they need to be and always try and maintain some leverage with customers; i.e. don’t complete a project or a sale until payment has been received.

2. Supplier debts are too high

Paying suppliers bills can post a direct threat to clients’ cashflow, especially if you advise business clients that work in sectors where there are multiple suppliers in their supply chain.

If sales income is low and supplier debts are high, paying these suppliers on time will leave a large hole in the company’s cash reserves. Working with clients to reduce supplier spending, negotiate better rates and agreed extended payment terms can all serve to spread the impact and preserve their positive cashflow position.

Helping clients to negotiate a temporary extension on payment terms is one quick way to remove a cashflow threat, as Stuart Budd, Commercial Director at FD Works, points out:

“A big issue for businesses is achieving favourable terms with suppliers to optimise working capital during growth, and then not neglecting core credit chasing to ensure that customers are reminded to pay in good time. Asking suppliers for extended terms or part-payments, and maintaining a dialogue with them at all times, helps to ease cashflow and build trust.”

3. Sales and cash income are too low

If your client’s business isn’t achieving the right level of sales, it won’t generate the cash income needed for positive cashflow. So it’s important to analyse their sales strategy and ensure there are no potential threats in their plan.

Careful research of the market, pricing, forecasted sales and revenue targets are all key elements to understanding the possible threat of below-par sales.

  • Get data around previous sales performance – so you understand their historic conversion rates or average pricing, allowing you to deliver realistic forecasts.
  • Help clients be realistic with sales targets – rather than being overly optimistic, as can be the case in a sales environment, help clients to understand what can be realistically achieved, based on their historic sales data.
  • Review clients’ marketing approach – and ensure they’re targeting the right customer audience and using digital and social media channels to achieve the best possible sales.

Helping clients to produce a clear sales plan, with realistic pricing, targets, timelines and promotion, will help them to improve the cash inflow from sales income.

4. ‘Days Sales Outstanding’ figure is not under control

It’s possible for sales figures to be high, but cash income to be low, usually due to your client’s customers failing to pay their invoices within the stated invoice terms.

The bigger that Days Sales Outstanding (DSO) number becomes, the smaller the cash pot will be – and that’s a recipe for cashflow issues in both the short and longer term. Start by finding out how to calculate DSO. Then, your role is to help the business speed up payment, and improve its underlying credit control policy.

Talking to clients about:

  • Efficient invoicing and payment – using online invoicing to speed up the process, and solutions like GoCardless for Direct Debit payments and Stripe for card payments – and making it clear to customers that payment is expected within the agreed terms.
  • Better reporting on their debt numbers – by using intelligent cashflow solutions like Fluidly to give clients a transparent view of incoming cash, DSO numbers and aged debt.
  • Automation of credit control – using software tools to chase up outstanding payment automatically using pre-written emails and scheduled reminders for the client’s finance team to make credit control calls to late-paying customers.

Combining these elements together can have a real impact on payment times, as Cheryl Price of CH Accountancy has found when advising their business clients:

“Our advice to clients is definitely to make the most of GoCardless and Direct Debit payment, and to take deposits upfront where they can. Automatic reminders are also great, and take an unpleasant job away from the business owner.”

5. Seasonality and market changes

Seasonality can be an ever-present threat for some businesses, with very few sectors enjoy smooth and steady sales across the whole business year.

Seasonal dips in income – for example, the drop in sales that hotels and hospitality businesses will see in the winter season – have to be forecasted, predicted and planned for.  It’s also important to watch out for seasonality that moves around year-on-year; for example, for retail and hospitality companies, Easter can take place any time from March 22nd to April 25th – and that means working the correct dates into your cashflow modelling and forecasts.

By using your understanding of specific industry sectors, and using the best in cashflow analysis and forecasting tools, you can help SME clients to see where the seasonal cash holes will appear, and plan to avoid them.

6. The threat of unplanned contingencies

Changing contingencies and unforeseen disasters can hit cashflow hard – so it’s important to have a meaningful contingency plan in place to reduce the potential risk.

The future is an unpredictable beast, and even with the best in forecasting and projections there are certain variables that it’s impossible to predict fully within your cashflow planning for clients.

Examples of these kinds of contingency could include:

  • Loss of a key customer contact and the breakdown of a customer relationship
  • The customer’s business going bust and clients being left unpaid
  • Economic conditions becoming unstable, making the market unpredictable (e.g. the Credit Crunch or Brexit)
  • Natural disasters, such floods or fires, hitting your clients’ customers.

Where possible, factor in a contingency for ‘unplanned events’ in your cashflow forecasts, and be sure that each business knows the number of weeks trading they have, based on their existing cash position. Suggest that clients set aside a buffer, as part of their cash reserves, to build some resilience into their cashflow should the worst happen.

7. Poor access to funding and finance

Poor cashflow can have a real impact on the perceived value of a business – affecting your SME clients’ ability to attract investors, access finance or borrow from lenders.

A poor cashflow history, a lack of control over the company’s existing cash pipeline and poor cashflow reporting documentation are all elements that will put off potential investors and lenders – with the somewhat ironic impact of worsening the company’s cashflow issues.

So be as proactive and directive as possible in partnering with your clients’ finance teams to avoid any potential cashflow threats – and work with them to increase the value of their business.

Using tech to overcome the cashflow threats

Better tracking, monitoring and forecasting of cashflow will help your SME clients to sidestep the key cashflow threats – and the latest in cloud-based cashflow tools make this easier than ever.

An intelligent cashflow tool like Fluidly gives you real-time reporting and forecasting of your client’s cash numbers, alerting you to any dips and perceived threats – keeping you and your clients one step ahead of the cash issues that may threaten to derail their business plans.

With careful analysis, planning and guidance, you will move from protecting clients from these perceived cashflow threats to putting their companies in a position of real strength their investment and growth prospects in the future.

Find out more about how Fluidly helps warn of threats to cashflow.


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