Secure growth week: Overcoming cash-flow hurdles

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With many SMEs across the UK looking to expand as the economy recovers, Aldermore’s secure growth week blog series sets out to explore the risk factors that pose a threat to stable growth.

undefinedIn this final instalment, the Bank puts the spotlight on finances, with guidance on overcoming the most common challenges that stand in the way of maintaining a healthy cash-flow.

It may be a well-worn mantra, but the saying ‘cash-flow is king’ still rings true for small businesses. Research from Western Union earlier this month suggested that despite the fact 70 per cent of British SMEs expect to grow in the next twelve months, many still express concern over short-term liquidity.

In particular, 44 per cent cite late payments as a major hurdle, with the average small firm now owed £38,186 in unpaid debt, according to data from BACS Payment Schemes. Aldermore recently turned to the SME support community on Twitter to gather suggestions for small firms on facing this mounting problem, with professional bodies such as the Forum of Private Businesses offering expert advice.

While there is no certain way for SMEs to avoid this issue, building close working relationships with clients, setting out payment terms clearly and accepting multiple forms of payment can encourage debtors to pay on time. By sending out invoices rapidly after a job, companies can set a strong example for their customers on efficient payments. Additionally, there are many financial tools available for small businesses looking to free up cash from unpaid debts, such as invoice discounting and invoice factoring.

Late payments are by no means the only source of cash-flow instability for SMEs though; overtrading represents another possible challenge. Following the recession, small firms are naturally keen to embrace growth opportunities, but should be careful to avoid over-stretching their business. Before taking on new contracts, however lucrative they may appear, it’s important to fully consider whether the firm can afford to shoulder the input costs involved, before returns begin to filter through.

At the other end of the scale, some SMEs operating in seasonal industries need to be well-prepared for the possibility that they will see little or even no business in quieter periods of the year. Putting together a well-researched cash forecast is essential in this scenario, allowing the firm to keep aside a proportion of earlier takings to sustain the business during the low season.

As secure growth week draws to a close, Aldermore hopes that businesses will find the information contained in this series useful and be able to put it to good use to achieve stable, sustainable growth.

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