All businesses – and that includes accountancy practices – have to be nimble and innovative to survive. Many small and medium-sized businesses have proved their flexibility and inventiveness by creating and exploiting a niche in which they can operate successfully, especially when competing with larger companies.

Yet, these very niche opportunities can also prove isolating for many firms. With prices restrained by market forces and costs being pushed up by monopoly suppliers, small businesses are seeing their profit margins compressed and are increasingly having to report falling returns or warnings that profits will not meet investors’ expectations.

For a rising number of SMEs, the struggle to compete with large companies’ oppressive powers has proved too difficult and they have collapsed into insolvency – fuelling the situation by leaving other small businesses with unpaid bills. Large companies harm their smaller suppliers by squeezing their cash flow by neglecting to pay outstanding bills.

Too many SMEs are the architects of their own destruction by ignoring their cash flow problems until it is too late to recover outstanding debts. There are in excess of 4.3 million SMEs in the UK with average outstanding monthly debts of £12,000 that are least 30 days overdue. Around 15,000 SMEs will fail in 2006 and cash flow problems will be a main driver of this failure.

It is often mistakenly thought that outsourcing debts to third parties is too expensive and, in any case, it is generally unavailable to SMEs. This is simply unfounded in the modern business environment. Help is now available from SME industry specialists that offer simple, quick and cost-effective methods to deal with such tasks by following easily trackable, yet official, collections routes, which in turn free up managers and owners to concentrate on the other areas of the business that need attention.

So how should SMEs go about managing their cash flow better? Overseeing a successful cash flow situation is all about getting the money from customers as soon as possible. Sounds simple enough, but without the correct tools in place credit control for SMEs can turn into a potential nightmare. These tools include optimising cash flow through leveraging the assets tied up in unpaid invoices, known as factoring, to credit management training courses offered and, in some cases, funded by government agencies such as Business Link.

Invoice finance is broken down into two basic products: invoice discounting and factoring. Factoring is a full service facility paying up to 85% of the invoice up front as soon as it is raised, as well as taking care of credit control. The remaining 15% comes through, less the factor’s charges, when the buyer pays. A company then knows it will be paid immediately and it can use this cash to either invest in the business or pay off its own creditors. Factoring is ideal for new companies that have yet to produce accounts, as funding is based on the strength of the firm’s invoices.

Firms often use invoice discounting as a flexible means of acquiring finance that would not normally be available. Here companies use their own credit control departments. But there will be times when firms will need a more direct approach to debt recovery. Success in recovering outstanding debts can be the difference between boom or bust for many firms.

Last year, business failures across all businesses were up on the previous year. But it was the SME sector, and those SMEs operating in the retail sector in particular, that bore the brunt, with the numbers of businesses going bust up 25% compared to 2004.

Large businesses are aware that their smaller counterparts operate on tight margins, but still take, on average, 40 days to pay them. This is clearly not acceptable, but while this practice continues, recognising the benefits of maintaining a good cash flow and utilising tools that help maintain a healthy cash flow situation, businesses and accountants charged with managing the businesses’ books, can help themselves stay out of administration.

DEBT RECOVERY

Close Credit Management research figures demonstrate that small businesses must be more proactive with regard to debt recovery. UK SMEs are failing to recover up to £50bn a month in outstanding debts.

This means that SMEs are losing around £2.7bn a year in interest payments, assuming a rate of 5.5%, jeopardising their cash flow and the very survival of their business.

Too many firms wait for three months before instructing a debt management specialist. The longer the customer’s balance remains unpaid, the less likely it is that the business will ever receive full payment. Conversely, the faster a business collects its debts, the shorter the operating cycle will be.

With the help of mainstream collection specialists developing innovative and more cost effective methods of collecting debts, SMEs can benefit from the knowledge and expertise of agencies more used to dealing with blue-chip and FTSE organisations at a fraction of the price.

Paul Butt is sales director of Close Credit Management and Debt Recovery Online.com