Study Reveals Smaller Firms Need for Working Capital Management Techniques
Siemens Financial Services (Siemens) has found that late payments to smaller firms in the UK has worsened over the last three years, whereas medium-sized and large companies have kept their invoice payment timings under control. In a study analysing the annual accounts of thousands of UK companies, Siemens reveal that smaller companies’ days sales outstanding (DSO) has risen from 69 days in 2004, to 80 days in 2006. This contrasts with medium-sized and large companies, which have kept the DSO steady at 62 days and 47 days respectively. The study concludes that smaller firms continue to be squeezed by their larger customers, and increasingly need to employ more sophisticated working capital management tools to manage cash flow deficits. Rod Tonna-Barthet, sales director at Siemens, comments, “Small firms are suffering. One factor will be increased competitive pressure that has forced large and medium-sized companies to ask their small suppliers to extend payment terms, effectively pushing cash flow pressure on the very companies that can’t afford it. Other factors might include the steady increase in personal and business insolvencies.” This report highlights the urgent need for legislative change that enacts and enforces real penalties for very overdue debt. The report also shows the need for greater education of small businesses in the use of sophisticated financing tools to manage their cash flow. All commentators on small business management note the risk associated with cash flow for this size of firm. More timely payment and cash flow smoothing are being achieved through the use of techniques such as asset finance and receivables finance (factoring and invoice discounting), or leasing and renting new equipment rather than buying equipment outright.