By Megan Doyle
Intuit’s 2019 State of Cash Flow Report found that 61 percent of SMEs around the world regularly struggle with cash flow.1 Meanwhile, other research showed how the cash flow consequences of late payments to SMEs can ripple out and impact the entire global economy.
Late payments became prevalent in the wake of the 2008 financial crisis, when larger companies, in particular, began extending payment terms. The recession is long past, but the practice remains common. Nearly a third of businesses say it takes longer than 30 days to receive invoice payments, though the average wait time for SMEs around the world is 29 days, according to the State of Cash Flow Report.2 Late payments may persist because of how SMEs bill their customers. Instead of using an advance payment to charge before or at the time of receiving goods or services, more than half of SMEs invoice after the fact.3
But, the report suggests that even if payments are made quickly, the lag between receiving and processing funds can still create cash flow challenges for SMEs—66 percent of SMEs say the biggest impact on cash flow is the amount of time it takes to process money after a payment is received.4
Cash flow can be a matter of success or failure for many SMEs. This is because their smaller size means they’re often unable to absorb the costs of late payments. What’s more, SMEs sometimes have no choice to accept late or overdue payments because they may be in a weaker position to negotiate with larger customers, according to the World Economic Forum.5
As such, 42 percent of SMEs have experienced cash flow issues in the last year alone, despite tax cuts, stimulus policies, and regulatory rollbacks designed to support the small business community.6 Additional approaches, such as recent invoice financing offerings from financial technology (fintech) firms, have potential to improve SME cash flow but come at a cost, and awareness and adoption is still at an early stage.
As of early 2019, the average SME had over $50,000 in outstanding receivables.7 Such negative cash flow can diminish opportunities for current and future investments, ultimately minimizing small business growth. In fact, U.S. SMEs, on average, have lost just over $43,000 by turning down projects due to insufficient cash flow, according to the Intuit research.8
But it’s not just small businesses. A survey of larger companies by trade credit insurer Euler Hermes Americas found that non-payment can also be problematic for larger businesses with revenues over $5 million.9 According to the survey, 70 percent of CFOs consider nonpayment a threat to their business, and they reported an average of 17.2 nonpayment events in the last three years.
The cash flow issues associated with late payments can impact more than the success of small businesses. Late payments can also trigger a chain reaction—companies that receive late payments may end up making late payments themselves.10 Of note, cash flow problems prevent 32 percent of SMEs from being able to pay their own vendors, pay off loans, or pay employees on time.11 These consequences can subsequently damage relationships between SMEs and their employees and vendors.
Cash flow issues from late payments have also been found to limit import-export trade. A 2016 survey by the U.S. National Small Business Association found that fear of not getting paid prevents almost 25 percent of U.S. SMEs from entering the global import-export market.12
Cash flow issues often don’t indicate a lack of funds in an SME’s pipeline. It can also be that funds aren’t readily available for expenses due to late customer payments. Cash flow problems from late payments can prevent small businesses from growing and even create a knock-on effect impacting the global economy as a whole.
Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.
1. State of Small Business Cash Flow, Intuit; https://quickbooks.intuit.com/r/cash-flow/state-of-cash-flow-report/
3. “QuickBooks Study: Cash Flow Woes Mean a Third of Small Businesses Can’t Make Payroll, Pay Bills,” Intuit; https://www.intuit.com/company/press-room/press-releases/2019/quickbooks-study-cash-flow-woes-mean-a-third-of-small-businesses-can-t-make-payroll-pay-bills/
4. State of Small Business Cash Flow, Intuit; https://quickbooks.intuit.com/r/cash-flow/state-of-cash-flow-report/
5. The Future of FinTech: A Paradigm Shift in Small Business Finance, World Economic Forum; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
6. State of Small Business Cash Flow, Intuit; https://quickbooks.intuit.com/r/cash-flow/state-of-cash-flow-report/
7. “QuickBooks Study: Cash Flow Woes Mean a Third of Small Businesses Can’t Make Payroll, Pay Bills,” Intuit; https://www.intuit.com/company/press-room/press-releases/2019/quickbooks-study-cash-flow-woes-mean-a-third-of-small-businesses-can-t-make-payroll-pay-bills/
9. “Euler Hermes Survey: CFOs Concerned About Escalating ‘Risky Business’ In 2019,” PR Newswire; https://www.prnewswire.com/news-releases/euler-hermes-survey-cfos-concerned-about-escalating-risky-business-in-2019-300788978.html
10. The Domino Effect: the impact of late payments, Plum Consulting; https://www.sage.com/en-us/blog/wp-content/uploads/sites/2/2017/12/Domino-Effect-Late-Payments-Research-Sage.pdf
11. “QuickBooks Study: Cash Flow Woes Mean a Third of Small Businesses Can’t Make Payroll, Pay Bills,” Intuit; https://www.intuit.com/company/press-room/press-releases/2019/quickbooks-study-cash-flow-woes-mean-a-third-of-small-businesses-can-t-make-payroll-pay-bills/
12. Small Business Exporting Survey, U.S. National Small Business Association and Small Business Exporters Association; http://www.nsba.biz/wp-content/uploads/2016/04/Export-Survey-2016-Final.pdf