Mind the Gap: Optimum Finance warns SMEs to uphold their payment terms

Inconsistent payment terms resulting in cash flow pressure and an opaque financial outlook are the key findings of a survey of SME businesses in the South West.

Invoice finance firm Optimum Finance surveyed owners and senior managers in thirty-three companies across the region to gauge their financial health and found that nearly a fifth of the businesses questioned (18.8%) cannot predict what the financial position of their company will be in three months’ time.

Worryingly, less than half of companies (48%) say they feel their business has a strong financial health with ten percent of firms saying that cash flow has been a cause for concern in the last 12 months of trading.

One of the main areas highlighted in the findings showed the huge variation in payment terms. The majority of firms (45%) have standard payment terms of 30 days but it appears these are not being respected by their customers and clients with only a fraction of companies (6%) saying they actually get paid on time in accordance with their stated terms.

Most firms say they get paid on time on at least 50% of occasions – indicating a regular pattern of late payments for almost half of all invoices issued by small and medium enterprises. 15% of businesses say they get paid on time between 25-50% of the time.

One business owner stated they felt obliged to offer a wide range of payment terms specific to each client claiming the ‘bigger the client’s business the longer the payment terms requested.’

Reviewing the findings, CEO of Optimum Finance Richard Pepler said: “We know that payments are incredibly inconsistent as that is the primary reason that companies come to us for help.

“If they cannot rely on getting cash in the bank when invoices fall due then this has a knock-on effect to their ability to pay their staff and suppliers which in turn results in a huge amount of stress and pressure on company bosses.

“Being able to access flexible funding solutions is an important feature of business growth strategies. We know that poor cash flow is the main reason that start ups fail in their first three years, but cash flow pressures in established businesses are less discussed but no less problematic.

“It is often the bigger firms with substantial capital reserves who are the ones not paying their smaller suppliers on time. The recent high profile collapse of Carillion brought this issue into the spotlight.”

“In order for a business to grow there will always be a need for capital investment whether in new staff, stock or other investment strategies. This requires businesses to be able to accurately forecast medium to long term finances in order to make decisions. A healthy cash flow is paramount to this and that’s why some firms choose funding support that we offer which releases cash owed to them tied up in invoices.”