LATE PAYMENTS TO SMEs CONTINUING

October 3, 2022

3 October 2022:  Under statutory legislation, there are two tests as to whether a company is insolvent.  These are often broadly referred to as the “balance sheet test” and the “cash flow test”.  In BRI’s firm wide experience spanning 40 years, a greater proportion of companies fail because they are unable to honour payments as and when they fall due.  Having said that, the liabilities of these companies often exceed total assets meaning they fail the balance sheet test as well.

One key aspect of rescuing a company is generating sufficient cash to finance continued trading.  In difficult times, directors have often already taken proactive action to review costs and to reduce these, where possible, in a multitude of different ways.  Directors should also look at monies tied up in working capital including debtors and, depending on the business, possibly stocks and work in progress.

Continuing research by the Federation of Small Businesses over a number of years shows that approximately 30 per cent of payments to small businesses are late which can have a serious adverse impact on cash flow.  These effects combined with the significant increase in costs for most businesses together with the reported difficulties in SMEs accessing lending has resulted in many companies struggling financially in such a challenging economic backdrop.

Whilst by no means an exhaustive list, some practical steps to mitigate late payments from customers include:

  • Check each client’s credit history as part of initially taking on a customer together with periodic checks for all customers thereafter
  • Have clear terms and conditions (possibly with professional assistance in drafting) and robust procedures to ensure customers agree to these
  • Agree additional work separately with customers
  • Issue accurate invoices promptly and quote all customer references that are required
  • Build close, strong and long-lasting relationships with clients
  • Review “aged debtors” (which details each outstanding sales invoices per customer) regularly, send reminders and monitor those clients often settling invoices late
  • Consider outsourcing the recovery of certain larger debts to specialists

BRI is committed to rescuing businesses (where possible) as this often represents the best outcome for creditors together with key stakeholders.  As a general rule, the earlier advice is taken, the greater the chance that a company can be rescued.  BRI will work closely and collaboratively with directors’ chosen professional advisors to assist with the drafting together with the implementation of a recovery plan.  In one particular case, the Finance Controller spent an increased time on credit control in each and every week which resulted in collecting some debts sooner and was able to agree negotiated settlements on certain disputed debts exceeding £500,000.  Sometimes, financial solutions are required as part of this process and BRI will recommend that expert advice be taken to ensure that directors choose the optimal solution for their business.