Can businesses effectively manage their Working Capital and ensure longevity? Or are they in denial about their processes?

Covid19 has put the focus back on cash flow. Working capital management is now more critical to business survival than ever.

Any business that, over the long term, spends more than it receives from customers will ultimately fail.

Working capital management is about more than this simple equation. Timing is everything, matching what you receive against what you owe over time. The management part is having the control and visibility to deal with the cycles of receipts and payments.

In recent years, we have seen an increasing number of substantial businesses fall into financial difficulties due to cash management chaos.

The recent poster child for this was Carillion living off supplier finance and living out some sort of parallel reality paying its shareholders dividends. A recent survey suggests that Carillion’s management may not be alone, leading to the question: Are UK finance bosses ‘in denial’ about payment performance?

Perception vs reality

Even before Covid19, late supplier payments, particularly those from larger enterprises to SME’s, was a well-documented and continuing financial problem in the UK. The research carried out in January 2020 identifies that many finance bosses, but not all, held a different view.

The research shows that 78% of finance decision-makers believed their company’s payment performance is either “excellent” or “good”. This is in contrast to similar research, carried out just two years prior, where 60% of UK finance decision-makers reported that their company struggled to pay suppliers on time. A further 20% had also stated that late payments were a “significant problem” for their business.

This research report “Perception vs reality – the real state of Accounts Payable and Purchase Order Processing in UK business” looked at the ongoing challenges and issues finance teams face with business payments and processes.

Only a quarter (25%) of large companies rated their payment performance as average to poor – a large drop from 64% in 2018. In comparison, 19% of medium sized companies rated their payment performance as average to poor – also lower than the 57% reported in 2018.

A “tipping point” is coming

The arrival of Covid19 has left no room for those with perceptions that everything is improving despite data to the contrary. Very few people will suggest the number of cases and deaths in the UK are testament to us being “World-class” in dealing with this crisis.

Similarly, those businesses who had relied on paying suppliers late to prop up themselves up while suffering from working capital chaos have little room for manoeuvre.

The post Covid19 era is seeing diminished cash inflows, initially eased by Government assistance, but by autumn business is likely to fully exposed to the vagaries of the market. At that stage, it will be vital to be fully in control of cash flow and have full visibility of commitments related to all liabilities: knowing when they fall due and when they need to be settled. Just paying late, and hoping this will compensate for a lack of visibility and control, will not be a sustainable working capital management strategy.

Recognising there is a problem is always the first step towards a solution. Business leaders should review the financial processes that enable the management of working capital management and address them upfront rather than continuing to believe the issue can be fudged by delaying payment to suppliers.

Daunting data

Back in 2018, The Federation of Small Businesses identified that around 50,000 small firms fail every year while waiting for late payments from clients, at an estimated cost to the economy nearing £2.5bn.

Government statistics provided by large businesses following the “Reporting on Payment Practices and Performance Regulation” (PPR) show that late payments have increased, with an average of 31% of supplier invoices now paid late compared to 29% three years ago.

The survey results suggest that many businesses financial processes are not robust enough to enable the effective management of working capital. 43% of finance decision-makers state their finance teams have no real-time visibility over supplier invoices in the accounts payable process, and 8% say they only have visibility once it is in the Accounts Payable ledger.

Being in control and able to choose when to pay, in contrast to being a victim of inefficient processing that results in surprises and late payments, is at the heart of whether a business is managing working capital or suffering from working capital chaos.

The investment case for bringing liabilities back in control has never been more compelling.

Before Covid19, the main concern was to do the right thing and be in a position to maintain good standard payment practices. Now any complacency here, maintained by false perceptions of improvements in processes that are not borne out in reality, could be the difference between a business surviving this crisis or going under.

Consequences

For each business in this crisis period certainty is key in cash flow management. Knowing when you will be paid and being able to trust that date is vital. If there is a trading relationship built on trust, suppliers may extend payment terms to fit in with their customer’s needs, provided they have certainty over cash inflow.

It has always been the case that late, beyond agreed terms, payments can have a big, negative impact on supplier relationships. In the Covid19 era when cash is king, supplier relationships will be sorely tested by those businesses that are not in control and cannot be relied upon to meet agreed payment dates. This will be particularly true where those payment terms are extended in a spirit of partnership.

In the survey, two-thirds (67%) of UK finance decision-makers said their finance team have to chase suppliers to request copies of supplier invoices. This spells danger for fined tuned supply chain relationships required to get through the crisis. In the 19% of cases where this was labelled as a serious and consistent problem, it is highly unlikely that a business can build the trust required to enable it to form the partnerships required to help it through this crisis.

The consequences are at best: that such poor supplier payment practices are likely to result in prices being increased to include a risk premium; at worst: severe disruption in the supply chain, through either, cash with order demands, delivery delays until payment is made or refusal to supply.

Ensuring longevity

One of the financial processes that enable effective working capital management is accounts payable. Here, improved efficiency, visibility and control can be achieved by using an automated accounts payable system.

This will speed up supplier invoice processing, by automatically capturing data off invoices, decreasing data entry errors, and ensure these invoices are promptly submitted to the correct staff for coding and approval. The status of invoices is visible throughout the process, ensuring no invoices are lost and are automatically posted to the finance system ready for payment well in advance of agreed terms.

If you are concerned about your own business’ payment performance, visibility over the purchase-to-payment process, or simply wish to review some of your financial processes, a member of our consulting team would be happy to help.

Book a demo with us to discover how we help our customers to optimise their processes, engage their teams and implement automated solutions.