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Late payments, cashflow and balance sheets: SMEs battling against insolvency

By Jonathan Gorvin, Executive Director of Strategy and Compliance at AAT

Recent data reveals that corporate insolvencies are at a 30-year high, with more than 25,000 registered in 2023 alone, and July 2024 saw the highest monthly number of compulsory liquidations since the onset of the pandemic. In an uncertain economic climate, it’s never been more important for small businesses to be ready to navigate potential financial and logistical pitfalls.

Jonathan Gorvin, Executive Director of Strategy and Compliance at AAT (Association of Accounting Technicians), whose members collectively serve more than 840,000 small businesses in the UK, welcomes the government’s new measures to tackle late payments that blight small businesses, the importance of SMEs having support to manage their cashflow and build solid balance sheets and discusses why financial literacy skills need to be embedded throughout our education system.

In 2023, UK business failures hit their highest level in 30 years. According to government figures, there were 25,158 UK corporate insolvencies in 2023, up 14% from the previous year. Not only this, but the most recent monthly figures show that after seasonal adjustment, the number of registered company insolvencies in England and Wales in July 2024 was 2,191, 16% higher than the same month the previous year. July also marked the highest month for compulsory liquidations since the pandemic, with 320 recorded.

A leading insolvency expert we spoke to suggested that this increase is largely down to the knock-on effect of the pandemic. During that time, rent was covered, furlough supported employee’s salaries and there were bounce back loans available, amongst other support. When that support was lifted it coincided with the Ukraine war, the rising cost of living and labour shortages. Cracks that were able to be temporarily papered over during the pandemic were now running deeper, affecting the foundations of some businesses and resulting in more insolvencies. 

The impact of late payments on small businesses

Whilst the climate has been challenging in recent years, there are other factors that impact SMEs ability to run; late payments being one of them. The impact of late payments on small businesses cannot be underestimated. Often, small businesses simply don’t have the cash reserves to weather persistent late payments, and subsequently end up having to get into debt, cease trading or, in the worst-case scenario, face insolvency.

The Federation of Small Businesses revealed the majority of small businesses experienced a late payment in 2022, which contributed to 40% of SMEs applying for credit to manage their cash flow. Indeed, government figures released in September 2024 show that every quarter, 52% of small firms in the UK suffer from late payments, costing SMEs £22,000 a year on average and contributing to 50,000 business closures annually. We’ve been long calling for large businesses to be held accountable for paying their suppliers on time.

We therefore welcomed the recent new measures announced by the government to tackle late payments that blight small businesses and the self-employed. It was particularly positive to see the upcoming new legislation will require all large businesses to include payment reporting in their annual reports, as well as taking enforcement action against those businesses that engage in a late payment culture and rewarding those businesses who are demonstrating that they meet good payment standards. 

Intervening early is key

Hopefully, the launch of the new Fair Payment Code, which replaces the Prompt Payment Code, will generate the essential change in behaviours required. But let’s be clear; late payments are just one of many issues facing small businesses that the government needs to strengthen their stance on. For example, SMEs should not be further burdened by the risk of debanking and left unable to access banking facilities, a practice that the Commons Treasury Select Committee reported has increased by 44% between 2022/23 and 2023/24.

It’s also about catching businesses that are facing difficulty early enough to prevent them from completely folding. What stops SME owners reaching out for help is often pride; they have dedicated time, energy and money to their venture and it’s difficult to face the fact it’s not worked. Other times it’s due to simply not knowing the genuine extent of their financial predicament.

Managing the cashflow and balance sheet of a business are the two fundamentals of staying financially sound. Just the actual words – cashflow and balance sheet – aren’t understood by many outside the financial world. We have to help business owners and explain these things in ways that are easy to understand. 

Without careful management of the finances, small businesses will unravel, which isn’t unusual. Analysis by Experian conducted on the opening and closure rates of limited companies between 2013-2022 showed more than a third (34%) of new businesses cease trade by the end of the second year and this increases to half (50%) by the end of the third year. 

Basic financial literacy should start in schools

Being an entrepreneur or business owner doesn’t suddenly equip you with financial expertise. Some of the most brilliant and inspiring business leaders outsource their accounting because they recognise they don’t have the knowledge themselves.

However, having basic finance literacy is something everyone – not just business owners, but everyone – should have. It should start in schools and it’s something which is woefully lacking in our education system. The state of financial education in UK secondary schools was assessed in 2023 by Compare the Market and MyBnk and revealed that two thirds (61%) of young adults do not recall receiving financial education at school, and those that did were taught only an estimated 48 minutes per month on average. Having basic financial literacy puts people a step ahead, allowing them to make informed decisions in their personal lives and also put it to good use if they decide to launch a career as a business owner.

Financial literacy won’t only help with the cashflow and balance sheet. If a small business owner takes out a loan or credit card, they will understand the best rates and deals. In a businesses’ infancy, when money is tight and there is little wriggle room, a 1% variance on repayment interest rates can be a factor in whether the owner is able to cover costs, keep their business going and pay their supply chain on time. When you’re operating on little money, the small percentages make a big difference.

Accountants need to use inclusive language

The role accountants play in the financial success of SMEs is huge. We have to build a relationship of trust with the owner, so they feel comfortable sharing their full financial situation with us. Part of that trust-building comes from being a licensed accountant; it gives business owners confidence they are in the hands of a qualified individual that is working to professional standards. 

We can also build trust by using more inclusive language. Our industry is one that is steeped in terminology and acronyms, that most of us realise the majority of people won’t understand. Using it amongst our peers is fine, but we have to know when to lose the complicated financial jargon so people can clearly understand what is going on in their business. Communicating to people on all levels is a skill in of itself. 

Be smart: get advice

We also have to raise awareness of the free resources out there for SMEs. We launched Informi.org.uk in 2016, a free-to-use website that provides support on all aspects of running a business. Later this year AAT will be launching an Informi 10-step survival guide for small businesses, sole traders and freelancers, with insights and tips including how to minimise business costs, make sure you get paid on time, keep your cash flow healthy, and set your prices right.

There is plenty of advice available out there. By using trusted sources, SME owners can chart a course through even some of the choppiest economic conditions. 

For further information please visit https://www.aat.org.uk/

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