Big Business and Late Payments
Operating cash-flow comes from core trading activity. It represents the cash needed to finance trading and to service borrowings. How well the average SME can manage these important activities depends on cashflow from accounts receivable.
In the past, big businesses have increasingly strong armed .SME suppliers to agree to extended payment terms. Two such are Heinz which pays its bills 90 days after the end of the month in which goods and services have been invoiced and brewery giant AB InBev which takes 120 days.
Late Payer - Heinz
What follows are examples of exactly how taking on business like this affects a supplier's cashflows. To try this for yourself, select Edit Forecasts from the top menu and go to "Cash Collection" or follow this link: https://www.figurewizard.com/cash-collection-and-payment.html
The figures are based on trade sales shown in the sample profit and loss Forecasts of £1,500,000 before taking on new business from Heinz and AB Inv.
Cash collection of Accounts Receivable ratios for the sample forecasts displayed in the Figurewizard website are set at 10% for month 1 - cash collected during the same month invoices were issued: 70% for month 2 - cash collected 30 days after the month of invoicing and 20% for month 3 - cash collected 60 days after the month of invoicing.and so on up to 100%
The collection ratios appear below in the 0% column, before a company like Heinz with 90 days payments are included. The next two show how those collection rates change when Heinz are included as 10% and 20% of total sales.
| Heinz Cash Collection | @ 0% of Accounts Receivable | @10% of Accounts Receivable | @ 20% of Accounts Receivable |
| Month 1 | 10% | 9% | 8% |
| Month 2 | 70% | 64% | 58% |
| Month 3 | 20% | 18% | 17% |
| Month 4 | 0% | 9% | 17% |
This next table shows how just by including Heinz and applying those revised cash collection ratios will change year-end cash flow, the bank and the bank plus undrwawn financing facilities such as an overdraft.
| Heinz; Liquidity and Cashflow | Operating Cashflow | Bank @ Year-End | Bank + Undrawn Finance |
| Heinz @ 0% Receivables | 12,208 | -35,439 | 14,561 |
| Heinz @ 10% Receivables | -6,923 | -56.766 | -6,766 |
| Heinz @ 20% Receivables | -26,055 | -78,139 | -28,139 |
Note that when a business bank account plus undrawn financing returns a negative, balance that will represent the amounts of extra cash the business will have to find to avoid cash-flow insolvency - Difficult when customers won't pay on time.
Late Payer - AB InBev
In the case of AB InBev in the UK the policy is not to pay their bills until 120 days after the month of delivery (month 5). The changes to Figurewizard sample forecast's percentages for cash collection including AB Inv at 10% and 20% respectively of total sales now become.
| AB Inv Cash Collection | @ 0% of Accounts Receivable | @ 10% of Accounts Receivable | @ 20% of Accounts Receivable |
| Month 1 | 10% | 10% | 10% |
| Month 2 | 70% | 60% | 50% |
| Month 3 | 20% | 20% | 20% |
| Month 4 | 0% | 0% | 0% |
| Month 5 | 0% | 10% | 20% |
Unsurprisingly the effect of these changes to cash flow, the bank and financing are even worse than those for Heinz.
| AB Inv Liquidity and Cashflow | Operating cashflow | Bank @ Year-End | Bank + Undrawn Finance |
| ABInv @ 0% Receivables | 12.208 | -15,123 | -42,453 |
| ABInv @ 10% Receivables | -15,123 | -69,965 | -96,537 |
| ABInv @ 20% Receivables | -42,453 | -15,965 | -46,537 |
All of these values were all calculated simply by editing the entries for monthly cash collection percentages for the online working example. Visitors are free to edit all examples to view the effects of that on all of the sample forecasts. The Interactive What-If Calculator is also well worth a look.
Supply Chain Finance
Many large companies imposing unsustainable payment terms such as these on their SME suppliers will often offer a supply chain finance facility through a third party provider, ostensibly to mitigate the damage they would otherwise suffer.
Thiey argue that this solves their supplier's cash flow problems - Wrong.
The first problem is that there is often a service / arrangement charge or fee attached to such a facility which, as an additional anual cost will constantly reduce operating profit as well as cash flow.
Supply Chain Finance and Cash Flows
Worse however is the effect on operating cash flow. As the tables above shows while this financing provides cash it is still "financing" not cash flow arising from the company's trading activities; also known as operations.
As operating cash flow represents whether or not a company is able to service its debts from its own operations, the effect of supply chain finance will almost certainly result in serious problems when it comes to raising cash for further investment.
Small Businesses Need Protection
Both Heinz and AB InBev claim that late payment was as a result of “mutual agreement.”
It is of course nothing of the kind. It results from threatening small suppliers with the loss of business - The lack of effective government action against practices like these is tantamount to tolerating a bully's charter for UK business, especially SME suppliers.
To view and learn more about how Figurewizard would calculate your operating cash flows and the bank, follow the links to the working examples below.
Labour brought in a right to statutory interest a few years back which hasn't made a blind bit of difference. It still doesn't affect the cash flow issue, which is the most pressing and some clients tell us they would close the account if we were to try and claim it.
One of our clients supplies AB and tells us that they can expect to have to wait for 120 days to get paid. They now use supply chain finance in order to maintain cash flow which however is expensive.
Supply chain finance or factoring are all very well but the price that has to be paid is reduced profits and reduced net operating revenue which in turn reduces operating cash flow.
This amounts to SMEs being forced to take on debt in order to underwrite big business clients' financing. That in our view is something that the law in the form of the Companies act ought to be addressing.