Earlier this year we released The Ultimate Small Business Guide To Managing Cash Flow to help business owners across the UK control their working capital and keep daily business operations running smoothly.
To supplement this guide, we are uncovering all the cash flow statistics, facts and figures you need to know for 2020. This report will also evidence the detrimental impacts late payments can have on small businesses, and ways that entrepreneurs can deal with these situations and work to cover shortfalls to improve their businesses in the long term.
- 5.7 million SMEs in the UK in 2018, accounting for over 99% of all businesses
- 78% of UK SMEs that are owed money are being forced to wait at least one month beyond their agreement terms before being paid
- 40% of UK SMEs that are owed money claim that large businesses are the worst late-paying offenders
The majority of the UK’s businesses are comprised of SMEs. Which is why it’s devastating to see that SMEs are the businesses losing out the most when it comes to late payments and unpaid invoices. Sadly, SMEs experience longer payment durations largely because of their limited power to negotiate with larger firms. They also tend to suffer the most because they are less likely to have the appropriate finance to cover shortfalls, face more expensive interest rates when obtaining external finance, and don’t always have the appropriate credit management systems in place to help manage payments.
In the worst cases, late payments can contribute to business insolvency. A recent survey found that 24% of UK businesses report late payments as a threat to their survival, the highest reported level across Europe.
Google Search Results For Cash Flow Queries
As a business owner, how much do you understand about cash flow? Ahrefs is a popular, online tool that uses algorithms to provide accurate backlink and SEO analysis. Using Ahrefs we were able to find out the most popular search queries relating to cash flow that Google receives annually:
|Search Term||UK Search Volume||Global Search Volume|
|What is cash flow?||700||11,000|
|How to improve cash flow||250||480|
|How to calculate cash flow||200||3,500|
|Cash flow forecast||4,800||9,900|
|Cash flow forecast template||1,700||2,900|
|Cash flow forecast example||450||680|
|How to do a cash flow forecast||150||230|
|What is a cash flow forecast?||350||450|
|Unpaid invoices legal action||70||110|
|Charging interest on late payments||150||220|
|Overdue invoice letter||200||330|
Despite cash flow management and planning being crucial to success, the table reveals that there remains confusion around forecasting and dealing with late payments and overdue invoices.
SME Cash Flow Statistics
Bacs Payment Schemes Limited conducted research into just how much late payments are costing the UK economy. The main takeaway stats included:
- 34% of SME business owners experiencing late payments say they have to rely on overdrafts to help them meet their monthly obligations
- 43% of SMEs spend roughly £4.4 billion in administration costs alone chasing late payments
- 11% of SMEs struggling with overdue invoices are forced to employ someone to chase up payments
Intuit Quickbooks conducted a global research project a few months ago in April. The project, entitled ‘The State of Small Business Cash Flow’ focused on cash flow experiences of self-employed workers and small business owners.
Their research revealed that:
- 1 in 7 small business owners have been left unable to pay employees because of cash flow issues. This equates to a huge 2.2 million people in the UK not being paid on time.
- 38% of small business owners who have suffered cash flow problems have been left unable to pay debts
- On average, small business owners lose a whopping £26,000 by turning work because of insufficient cash flow
“Cash is oxygen for small businesses and without it they cannot breathe. The combination of chasing invoices and bad payment practices mean small businesses run out of accessible cash. This has a real impact on their ability to take on new work, pay suppliers, their employees or themselves on time”
- Chris Evans, Country Manager Intuit Quickbooks
Hiscox is an international specialist insurer that has over 100 years’ experience in protecting businesses of all sizes. Their small business knowledge centre provides SME resources and insight on industry topics. Working with Bloomberg in 2016 they revealed that a huge 8 out of 10 entrepreneurs who start businesses fail within the first 18 months of trading. Cash flow is listed as the number one reason for business failures.
Accountancy software company FreeAgent analysed their customer invoices during 2018 and found just 58% of invoices were paid on time or within three days of their calendar deadline. This drops to 47% in Northern Ireland. Their findings revealed that across the UK, Sheffield was the city where late payments were most prevalent. A survey conducted by FreeAgent found that roughly 50% of SMEs wanted a compensation system put in place and a structured system of penalties against late payers.
In a survey we conducted in January to reveal the UK’s business aspirations, we found that 64% of the British workforce has entrepreneurial dreams. It is interesting to note, however, that 41% of participants surveyed are put off by setting up their own business because of money fears and insufficient funds. We can assume that as well as burdening business owners, anxieties over cash flow issues also deter aspiring entrepreneurs from setting up.
Xero’s Small Business Insights Dashboard
Small business platform Xero, boasts over 1.8 million small business customers. Their Small Business Insights is a dashboard that reveals the health of SMEs across the UK. For June 2019, only 52% of small businesses were cash flow positive, on average, small businesses were paid 9 days late.
Research from Xero & PayPal reveals over 1/3 (37%) of small business owners have considered closing their businesses in the last year alone due to problems with late payments. Further insights for the last year include:
- 52% of small business owners have used personal savings or borrowed money from friends and family to keep their businesses alive
- 26% stated their physical health would be better if late payments was no longer an issue
- 43% admitted that late payments affected their mental health, causing sleepless nights
- 27% felt that they would be in a stronger position to grow their businesses if the late payment problem came to an end
"Late payments don't just damage business finances and relationships; they can compromise personal finances and relationships. Our research illustrates how getting paid on time can have a dramatic effect on a small business owner's happiness. When they struggle, the whole of the UK struggles. While we welcome the Small Business Commissioner's 'traffic light' warning system for the worst offenders of late payments, more action needs to be taken." - Gary Turner, Co-founder & Managing Director, Xero
”For small businesses looking to grow, time and money are paramount. Late payments sap both and prevent a business owner from investing in the technology, staff or stock needed to sustain their business. That’s why we have been working closely with Xero to try and find solutions to help businesses get paid faster” - Nicola Longfield, Director of Small & Medium Business, PayPal UK
The UK’s Modern Industrial Strategy
As part of the UK’s Modern Industrial Strategy, new proposals were announced toward the end of 2018, calling for:
- Evidence to help review the best ways company boards can put responsible payment practices in place throughout their supply chain, including:
- Present payment practices and experiences
- Existing measures and new measures to improve payment practices
- The promotion of innovative technologies, such as accounting software, to help UK SMEs manage their payment processes
As a whole, the strategy’s aim is to help small businesses deliver growth and jobs. According to Gov.uk, ¼ of UK businesses report late payments as a threat to their survival. The Federation of Small Businesses predicts that combatting late payments could keep an additional 50,000 businesses open every year, adding £2.5 billion to the economy.
Acknowledging the fact that a number of larger businesses use extended payment terms and late payments as a means of exerting control over small businesses involved in their supply chain, Cabinet Office Minister for Implementation Oliver Dowden commented ‘We expect the highest payment standards from both the government and big business. That is why we will commit to the central government aiming to pay 90% of undisputed invoices from small and medium-sized businesses within 5 days. Small firms can also report poor payment practices via our Mystery Shopper service, which ensures their voices are heard.’
According to the National Chairman of the Federation of Small Businesses, Mike Cherry, “Late payment is the biggest challenge affecting small businesses and it is good to see the government getting serious about this issue, especially when it comes to large firms paying their supply chains promptly. The voluntary Prompt Payment Code is not working when it allows signatories like Carillon to pay on terms of over 120 days, so we want to see a new tough and transparent compliance regime being proposed.
Involving Small Business Commissioner Paul Uppal with the code is also right as it shows a more joined-up approach to this difficult issue. Further, it is a positive step that the central government will set an example - paying 90% of undisputed invoices from small and medium-sized businesses within five days”
The Impacts Of Cash Flow Issues: Advice For Small Businesses
Rochelle White PR:
In January 2018 we interviewed Rochelle White, who founded her PR agency in 2015 whilst attempting to break into the fashion industry. Rochelle took the time to give us her experience with cash flow in the first years of Rochelle White PR trading.
“When I first started my business, I had no real systems, policies or processes in place. 2016 and 2017 were massive learning curves for me and opened my eyes in regards to understanding the importance of cash flow and knowing your numbers. In 2017 I had taken on new clients and because I didn’t have any clear processes I was hoping they would transfer their fees via a bank transfer. That was a major mistake, they didn’t pay and I was always chasing invoices. I was out of pocket and really stressed. I knew that something had to change.
”In early 2018, I sorted out my process, policies and procedures and then invested in an online accounting system. This was a game changer. I became very aware of how much money was coming into the business and it helped me manage the business finances much better. It gave a breakdown of cash-flow, account deadline details, tax bills and more.
”I would recommend to anyone struggling to:
1. Have good process and structure in place
2. Invest in an online accounting software that breaks down business costs and everything can be tracked and monitored clearly
3. Know your numbers and you’ll know where you are as a business
4. Look at your accounts often, don’t just leave it to the accountant to do
5. Have a clear plan to what you are trying to achieve and review your cash flow to help you do this
Right Path Fitness:
Right Path Fitness is a health and well-being company based in London that provides personal training sessions and Zone Body Fit classes. Founder of Right Path Fitness, Keith McNiven got in touch to offer some words of wisdom following his own cash flow experiences:
”I run a personal training company. I’ve just opened my first studio but it’s been hard (albeit rewarding) to finally get to this point. At one point, I had issues with cash flow. Because of unforeseen circumstances and construction delays to the studio, my business suffered temporarily - as I had to downscale for a short time.
However, I secured investment and put together a plan of action, and although it was tough, the reward has been incredible in the end (the first day I opened the doors to my own studio felt amazing). I also learned a valuable lesson; always have at least 25% more in finances than you’ll think you need.”
Entrepreneur Colin Hewitt experienced cash flow issues as the Managing Director of a digital design agency in the early 2000s. His cash flow issues became so serious that he started using a spreadsheet that he originally created to get out of his student debt in a bid to help his business. The spreadsheet he created was so effective that he turned it into an app called Float.
Float helps thousands of businesses globally with their cash flow issues, helping them determine whether they need a loan, can afford to hire new members of staff and more. Colin believes strongly that cash flow is the single biggest problem keeping business owners like himself awake at the night. We chatted to Colin about the ways his app, Float, can help small businesses.
“80% of failed businesses are the result of poor finance management and poor cash flow forecasting. A common challenge is not being adequately prepared for typical cash crunch scenarios, in which late paying customers, an unexpected expense, or a poor sales quarter leave a business short on cash. The consequences of this range from delayed payments and emergency financing to redundancies and, in the worst cases, bankruptcy.
“Businesses need to know exactly how much money they have in the reserve at any given time, as well as understanding what is going in and out, and when. This is the only way to prepare for these negative business scenarios in advance and know which ones will put your business into the red. Being armed with this data also helps companies to act swiftly and decisively when something does go wrong, rather than finding out at the end of the month, or worse still, at the end of the financial quarter. For instance, if a big client goes bankrupt and can’t afford to pay their last invoice, a business needs to know exactly how that impacts their finances. The quicker a business can react, the better the result. For instance, if the business needs an emergency loan to cover the deficit, they will always get a better rate if they apply in advance. If an organisation applies for a loan only once the well has gone dry, the bank knows that they have them over a barrel and will charge accordingly.
“The other cashflow challenge is knowing how much money you can afford to invest back into your business. Again, this comes down to knowing your finances in granular detail. A business needs to know that if they hire a new sales manager on £X per year, they need to increase sales by Y% to get a return on the extra spend.
“Spreadsheets are great for longer term forecasting, as you’ve got complete control, but for something that’s going to be up to date and constantly in sync with your invoicing, bills and sales predictions you need a solution that integrates with your accounting software, and you need to establish a weekly bookkeeping practice. Updating spreadsheets is also an extremely laborious process, but there are apps that will update automatically with information from your accounting software, saving your business lots of time and effort.”
Creating A Responsible Payment Culture
Creating A Responsible Payment Culture forms an important part of the Government’s consideration on what more can be done to create a responsible payment culture in public sector contracts. The document discusses the existing measures in place to improve payment practices, including:
The Late Payment of Commercial Debts (Interest) Act 1998 – giving suppliers the right to charge interest on late payment, as well as being able to reclaim administrative costs incurred when chasing late payments. The Act also put in place maximum 30 day payment terms for public authority transactions and 60 day payment terms between businesses. The only exception to this rule is if the businesses agree to longer terms that aren’t considered grossly unfair to the supplier.
The definition of grossly unfair is case dependent, but as a general rule of thumb, the following three aspects are deemed as grossly unfair;
- Gross deviation from good commercial practice, contrary to good faith and fair dealing
- The types of goods and services in question
- If the purchase has objective reasons to deviate from the 60 day payment term
The Prompt Payment Code 2008 – set up to support the above legislation by the Chartered Institute of Credit Management, used a voluntary measure to change the late payment culture. All code signatories agreed to pay 95% of their invoices within 60 days, with the promise to work towards 30 days as normal practice. The code further sought to lay out clear guidance to suppliers on payment procedures complaints and disputes. By September 2018, over 2,000 organisations were signed up.
The Small Business, Enterprise & Employment Act 2015 – prompted a new duty for large businesses to report on their payment practices and policies, fully implemented through The Reporting on Payment Practices and Performance Regulations 2017. The act also brought about the UK’s first Small Business Commissioner to provide advice and insight to small businesses on resolving payment disputes.
Also discussed in Creating A Responsible Payment Culture are opinions on new measures that can be taken to further help the ongoing issues. The first point covered are the behavioural change mechanisms which will help to ensure that businesses comply with new requirements. The three mechanisms are:
- Public pressure
- Companies and suppliers publicising their reports for comparison
- Good payment behaviour led by responsible companies encouraging other businesses
Technology is also noted as a key factor to making payment practices more efficient and productive. The report highlights the fact that international evidence from the Business Productivity Review shows that UK businesses’ adoption of technology falls behind the EU’s best performers. Processing of invoices too often leads to delays of payment, more use of accounting software can help with this. Brand new measures were announced on the 19th June that could see larger businesses being fined for the first time for failing to pay smaller suppliers on time. Part of the new measures include the Business Basics Fund competition, offering up to £1 million in funding to encourage SMEs boost their productivity through technology.
Seeking Legal Action For Unpaid Invoices
The Small Business Commissioner offers helpful advice on the legal action small business owners can take in the event they are dealing with unpaid invoices. The first port of call suggested is seeking legal advice from an advisor or solicitor to seek the best course of legal action situation dependent. It’s important to find someone who has experience in dealing with debt recovery, and a number of solicitors offer a first appointment for free or a small fee.
Before taking a claim to court and going through a judge, a solicitor’s letter or money claim can be effective in prompting customers to pay the money they owe. A money claim is also referred to as a small claim made for money owed, including interest and compensation. When a customer disagrees with a claim, it’s important to seek legal advice if:
- The customer claims to have reasons for not paying for goods and services
- The existing contract is complex
- The money owed exceeds £10,000
If this doesn’t work, before going to court it’s important to keep all proof that evidences the business has tried to resolve the payment problem. Proof includes:
- Emails, letters and all records showing negotiations and mediation
- A letter explaining to the customer or client that the business plans to take legal action if the problem continues
Hearing fees when taking a customer or client to court for claims less than £300 start at £25 - £35, but the Small Business Commissioner warns that the amount charged will be dependent on where the business owner is based in the UK and how much money is owed.
After a court orders the customer or client to pay, enforcing payment in the event they fail to do so sadly requires more fees to be paid. Fees for enforcement start at around £55 before bailiffs will be sent to collect the money.