“20% of SMEs are running into cash-flow problems because of late payment[s],” says CYBG

“20% of SMEs are running into cash-flow problems because of late payment[s],” says CYBG

Earlier this month, Accountancy Age spoke with Graeme Sands, the corporate and mid-market director of the Clydesdale and Yorkshire Banking Group (CYBG) about UK SMEs

Graeme Sands, the corporate and mid-market director at CYBG spoke with Accountancy Age earlier this month to talk about the current issues facing SMEs. Unsurprisingly, Brexit featured heavily in the discussion.

“My job is principally to decide what we do for businesses that have a turnover of more than £2m,” Sands tells Accountancy Age.

He continues: “So, by that I mean: What services do we provide them? What markets do we focus on? Which industry sectors do we focus on? What outcomes do we expect for customers? What do they expect from us?”

“About 30% of payments to small businesses are late from the [Minister for Small Business, Consumers and Corporate Responsibility, Kelly Tolhurst MP].”

CYBG recently released research the bank conducted in conjunction with The Telegraph, that zeroed in on some specific statistics that have helped to outline the current issues UK SMEs are most concerned with.

65% of London-based businesses have claimed that the availability of affordable housing in the capital is causing problems for them. Elsewhere, the percentage of those dissatisfied with the pricing of housing (the north east, for example) is far less.

However, the reverse has been found when looking at securing recruits for their companies, with 41% of SMEs in Yorkshire & Humber struggling in this area.

When speaking with Sands, he was keen to highlight two specific areas in which SMEs are currently struggling, beyond the research CYBG and The Telegraph has published.

About the first point he raises, he says: “I think it’s something that drops off the agenda every so often, and I think that’s wrong.”

“Business costs have been running anywhere between 0.2% and 0.5% above the general rate of inflation for more than a year or so now. What that means is that, across business, the gross margins a company is making are being put under pressure. And the biggest component in that cost inflation – when you break it down – is employment costs.”

Sands says: “Slow payments to businesses are a systemic issue in the UK, and indeed in other countries. About 30% of payments to small businesses are late from the [Minister for Small Business, Consumers and Corporate Responsibility, Kelly Tolhurst MP].

“The average value of each of those late payments is in excess of £6,000—that’s absolutely gigantic. 20% of small businesses are running into cashflow problems because of a late payment.”

“If you add up all the current late payments in the system, it comes to about £2.5bn a year,” the director reveals to Accountancy Age. “So that is a big problem [for SMEs]; it puts a lot of pressure on cash-flows and creates an awful lot of stress for business owners.”

It is important to note that the issue of late payments is not only restricted to smaller businesses in the UK, it is more that about how the financial strain is more easily felt by SMEs; essentially, bigger corporations can absorb the hit.

Sands agrees: “I think the smaller the company, the more it becomes an issue. It’s not like bigger businesses don’t suffer from late payments—they absolutely do. We have seen some very high-profile instances in the last six months. But it really impacts SMEs. It also impacts their focus on other day-to-day issues in everyday business.”

“GDP has been OK—not disastrously bad. So, what is it out there that is causing SMEs to have this very low level of confidence in the future? I think Brexit is probably that big cloud on the horizon.”

The second point of concern for SMEs highlighted by Sands is that of the general rate of inflation, and costs running above this.  

“Business costs have been running anywhere between 0.2% and 0.5% above the general rate of inflation for more than a year or so now,” Sands says. “What that means is that, across business, the gross margins a company is making are being put under pressure. The biggest component in that cost inflation – when you break it down – is employment costs.”

The “B-word”

According to their research, CYBG reported that 39% of British SMEs believe that leaving the EU will make them worse off. Ironically, 39% believe they will be unaffected. If nothing else, this is an accurate representation of how divided all aspects of UK business is across the board.

“I think the bigger issue that is bound to crop up is what will happen around Brexit,” says Sands. “Or, indeed, that nothing happens around Brexit.”

“With SMEs, I think there’s a thought process that they are less likely to be affected internationally than a bigger corporation, and I think that’s not right. Many SMEs are pretty engaged in that.”

Of all sectors, manufacturing businesses appear to be showing the highest level of concern about Brexit, with 47% believing that they will be worse off after leaving the EU, CYBG revealed in their research.  

Sands adds: Consistently, what we’ve seen over the last three years now is a decline in the levels of business confidence—it is quite stark. This seems to exist even when other economic indicators seem to be relatively positive.

“I think what that is telling us is that perhaps the business environment is not desperately bad in general—[for example,] employment is good.

“[With regards to] cost inflation for wages [it can be] a bad thing for businesses because it is of cost to them—but it also means that people in the economy typically have more disposable income; businesses can benefit from that.

“GDP has been OK—not disastrously bad. So, what is it out there that is causing SMEs to have this very low level of confidence in the future? I think Brexit is probably that big cloud on the horizon. The continued lack of uncertainty is really beginning to weigh on the industry. It doesn’t look like that uncertainty is going to be definitively solved by the 29 March.”

“I think the big problem is that they can’t be that far ahead of it, because they can’t know what is going to happen next. If the government doesn’t know – as they don’t appear to – and if the accountancy and legal professions don’t know, if banks don’t know, business owners aren’t going to know.”

Sands continues: “With SMEs, I think there’s a thought process that they are less likely to be affected internationally than a bigger corporation, and I think that’s not right. Many SMEs are pretty engaged in that.

“There’s a lot of uncertainty around how trade relations are now going to affect SMEs. We don’t have any clarity on export tariffs, import tariffs, and regulatory alignment. People are having to guess—they’re not exactly thinking that this is going to be a seamless transition. It is important that SMEs engage and respond to [it as much as possible].”

More than 50% of professional services firms have confirmed their belief that Brexit will be good for business due to the amount of changes that will be enforced. Regulatory and taxation laws could very likely be changed to encourage external companies to engage in the UK economy—to the benefit of UK SMEs.

For accountants and lawyers specifically, there is potential for this short-term uncertainty to benefit their firms. As the regulation laws blur and become increasingly complicated, businesses will turn to these two industries for advice.

“I know quite a few academics at the moment who are putting forward some pretty compelling work about the fact that we could do much more in the SME sector around management practices to increase the efficiency of the workforce.”

“Whilst that’s really good for professional services, it is an additional cost for businesses,” Sands points out. “And business costs are already running above the general rate of inflation. Adding more cost to those businesses, on top of the uncertainty, and on top of future hiccups (such as changes to the likes of supply chains)—that’s a pretty long list of issues SMEs have to contend with.”

Clearing a path through the uncertainty

Of course, although a degree of regulatory change is to the benefit of accountants and lawyers, it becomes difficult if they themselves do not fully know what the future will hold.

To an extent, banks are in the same boat, for Sands says: “If the question is: Do we struggle to outline for our customers what the future will look like? Absolutely we do.”

The CYBG director tells Accountancy Age: “I think, from our experience, businesses are as ahead of the issue as they can be. I think the big problem is that there is only so far they can be ahead of it, because they can’t know what is going to happen next.

“If the government doesn’t know – as they don’t appear to – and if the accountancy and legal professions don’t know, if banks don’t know, business owners aren’t going to know.

“All businesses care about is the continuity of their business and the continuity of employment for the workforce. There’s a limit to how much they can possibly know.”

Technology and SMEs

When asked whether he sees a divide between the implementation of technology in SMEs when compared to bigger corporations, Sands replies: “The way I tend to think about it is that the SME sector has been backed by a venture capital private equity industry—they have been innovative in creating that technology.”

Of those asked by CYBG and The Telegraph, 58% of firms believe that their level of investment in technology will stay the same in 2019, 23% expect it to increase, and just 8% expect a reduction.

“We’re going to get into a position where there are sustained increases in wages and salaries, and that’s not necessarily been the case for quite a number of years now—arguably for almost a decade.”

“I think the applicability of a lot of the financial technology for SMEs is pretty limited,” Sands adds. This is despite the fact that 70% of the decision-makers in SMEs have a clear grasp of their firm’s capabilities.

“Are SMEs investing in technology? Yes, I think our experience says that, where we can help them, they are. But the cost of technology is becoming a BAU spend for a lot of businesses.”

What else is going to change?

“One big change that we’re going to see over the next few years is that average wage cost is going to continue to rise,” says Sands.

“We’re going to get into a position where there are sustained increases in wages and salaries, and that’s not necessarily been the case for quite a number of years now—arguably for almost a decade.”

To combat this, Sands advises that SMEs look over their pricing strategies to consider the kind of revenue they can generate.

“They will need to think about efficiency and gains—that is through considering some form of capital investment, or through management practices,” he says. “I know quite a few academics at the moment who are putting forward some pretty compelling work about the fact that we could do much more in the SME sector around management practices to increase the efficiency of the workforce.

“I think SMEs are really going to have to think about that over the next two or three years, because this embryonic trend that we’re beginning to see of real wage growth is going to continue, and, if we do get Brexit – however that looks – I think the chances are that, in some shape or form, it will somewhat limit the availability of labour in the UK.”

It can be concluded that this will “exacerbate the trend we are already seeing in the increase in wages.”

Despite the myriad of challenges on the average SME’s horizon, Sands is confident that UK businesses will be able to deal with whatever comes their way.

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