Late Payers and Cash Flow

After lockdown, late payment of accounts receivable especially from big companies is an issue that needs resolving. This is what it does to your cash.

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

Because all Figurewizard sample forecasts are all working examples it is possible to select "edit" and make your own changes to cash collection ratios to understand how changes can dramatically depreciate liquidity and cash flows. What follows are examples of that.

Cash collection 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.

Those 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.

Monthly Cash Collection. .Before heinz Heinz @ 10%  of cash collection Heinz @ 20%  of cash collection
Month 1 10% 10% 10%
Month 2 70% 60% 50%
Month 3 20% 20% 20%
Month 4 0% 10% 20%

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.

Cash and Cashflows Heinz @ 0%    of cash collection Heinz @  10%   of cash collection Heinz @  20%   of cash collection
Operating Cash Flow 12,208 -6,923 -26,055
Bank @ Year End -35,439 -56.766 -78,139
Bank plus Undrawn Financing 14,561 -6,766 -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.

Monthly Cash Collection % ratios cash collection before AB InBev AB InBev  @ 10%  of cash collection AB InBev  @ 20%  of cash collection
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.

Cash and Cashflows Before AB InBev  AB InBev  @ 10%  of cash collection AB InBev  @ 20%  of cash collection
Operating Cash Flow 12.208 -15,123 -42,453
Bank @ Year End -35,439 -69,965 -96,537
Bank plus Undrawn Financing 14,561 -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 disgraceful payment terms such as these on their SME suppliers 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.

It is not the panacea that it might seem. The first problem is that there is often a service / arrangement charge or fee attached which as a new 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 and possible bankruptcy as a result - 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.

What is a Monthly Cash Flow Forecast What is Pretax Profit How does a balance sheet balance? Lockdown Recovery: Forecasting Profits, Cash and Finance. How to Apply for Business Interruption Scheme with Figurewizard How to calculate liquidity and short-term liquidity How to calculate markup and margin The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 How to make profits and not run out of cash Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow? What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions How Depreciation is Calculated What is Business Operating Activity What are Fixed Assets Liquidity and Cash Flow Balance Sheet Liabilities and Leases Stock or Inventory Control What is Distressed Stock or Inventory What is Interest Suspense Account Product Safety Laws What is a Bill of Exchange What is Payment at Sight What is a Pro Forma Invoice What is a Bill of Lading What is a packing note What is Demurrage Cash Flow Forecasts and Planning Factoring: Invoice Discounting and Cash Flow How Does VAT Work Figurewizard as a Sales Aid for Factoring and Invoice Discounting