This week statistics from the Asset Based Finance Association (ABFA) revealed that businesses that have annual turnover of less than £1m take, on average, 72 days to collect payment from their customers.
Consequently a business with annual sales of £0.5m will be owed, at any given time, based on the above 72 day figure, just under £100k.
(If it collected payments in 30 days, not 72, the average amount owed would be nearer £40k a £60k difference!)
Being owed £100k, with annual sales of £500k, brings many issues, from the intangible worry about whether customers will ever pay to the very tangible requirement of financing. Suppliers and staff need paying, rent/rates and other overheads continue to fall due, HMRC liabilities, including PAYE & VAT continue and so on. Consequently there are acute dangers in not addressing outstanding customer balances either by careful managing or by putting in place appropriate finance facilities, ideally both.
If, and it’s a very big if, customers paid according to term then the issue would be minimised but sadly in the UK the business culture & history is such that late payments are simply a fact of business life. Many large household names are guilty of deliberate policies of withholding payment; an unacceptable policy that these large businesses often shrug off as prudent practice.
On the basis the cultural change required in business practice won’t be happening any time soon the funding issue remains. One option is to work hard, extremely hard, to bring down the time taken to collect. Easier said than done, it requires resources that may be needed elsewhere, there’s a danger in alienating customers by chasing too hard and it may, in any event be a completely fruitless exercise given the position some customers adopt regarding supplier payments.
Consequently finance is critical and without the appropriate type business survival is questionable. It used to be a general rule of thumb that the banks may consider an overdraft level to be suitable if it equated to roughly one months sales. Using the example of a £500k turnover business an overdraft of around £40k would be insufficient and would be continually strained.
Invoice finance is ideal and can accommodate both slow paying customers and growth. With access to up to 90% of amounts owed (possibly £90k available in the example, as compared to a bank facility likely to be around £40k) funding benefits are clear.
Choices are wide so independent advice can really benefit, the web may point an enquirer in a direction with no thought applied so there is no substitute to face to face advice on a very specialist issue.
We help businesses, large and small, to maximise their funding options and can demonstrate a real value added proposition. If you would like to learn please call.