Small business owners have a lot on their plates, and paying employees can be difficult. Your employees will suffer if you don’t make the payment. Payroll procedures play a significant role in the smooth operation of a small business, and cash flow management is essential.
In a survey of over 500 small and medium-sized businesses in South Africa, it was found that an astounding 91% of them are suffering from the consequences of unpaid invoices. This concerning pattern suggests that there is a rising culture of late payments.
The global small business platform Xero conducted a survey which is reported in their report The State of Late Payments. The survey also indicates that the average overdue invoice is settled approximately 18 days, or roughly two and a half weeks, after it is due.
Payment delays have serious repercussions and have a substantial impact on these companies’ ability to fulfill their own financial obligations, such as paying employees and suppliers.
“People are the lifeblood of any business, large or small. As a result, ensuring timely payroll and salary payments is not just a legal obligation but also a moral duty,” according to Michelle Austin, finance director of Keegor Group SA.
She offers small and medium-sized enterprises the following three tactics to guarantee that they always have funds for payroll and salaries:
Make a thorough cash flow projection
A strong tool that can assist SMEs in projecting their future financial requirements and locating possible cashflow gaps is a cashflow forecast. The Department of Small Business Development reports that 70% to 80% of SMEs in South Africa close their doors within the first five years as a result of financial difficulties, with cash flow problems being one of the main causes of these failures. Approximately 50% of those who survive make it to the next five years.
“Cashflow forecasting is the bedrock of financial planning for SMEs. Without it, you are essentially navigating a financial blind spot,” Austin explains.
As a result, companies ought to prepare a thorough cash flow projection for the minimum of the upcoming 12 months. All revenue streams, such as sales and investments, as well as all anticipated costs, such as rent, utilities, salaries, and supplier payments, should be included in this projection.
Business owners can then foresee possible cashflow problems and take proactive steps to address them by monitoring and analyzing these numbers.
Put in place efficient systems for billing and collecting payments
Customer late payments can have a big impact on a business’s cash flow and make it difficult to fulfill payroll obligations. According to recent research, 48% of South African SMEs say that cash flow and past-due invoices are their top concerns, highlighting the effects of delayed payments on these businesses.
According to a recent Xero study, small business owners spend an average of 1.3 days a month following up on outstanding invoices; on average, an invoice is settled 10 days after it is due.
“A structured approach to receivables management is paramount. It can mean the difference between a thriving business and one constantly struggling to meet payroll obligations,” Austin says.
SMEs can use efficient systems for invoicing and collecting payments to tackle this issue. This entails issuing bills as soon as possible, outlining precise terms for payment, and pursuing late payers. Furthermore, you can incentivize customers to pay their bills on time by providing rewards for early payments or penalties for late payments.
Construct a safety net for finances
Unexpected events can affect company operations and deplete cash reserves even with meticulous planning and effective cashflow management. SMEs should think about setting up an emergency fund or line of credit to make sure they always have cash on hand for payroll and salaries during these hard times.
Austin explains the importance of financial buffers by saying, “Think of it as a business’ insurance policy. It provides peace of mind during uncertain economic conditions.”
A Fatoki and Smit report states that new SMEs in South Africa frequently encounter difficulties securing outside funding. With only 0.2% of them using trade credit, emerging SMEs in South Africa are less equipped to withstand financial hardships.
Businesses can bridge the gap during difficult times without compromising their ability to pay their employees by proactively securing a line of credit or setting aside a portion of profits as an emergency fund.
The financial stability and job satisfaction of small and medium-sized enterprises depend heavily on maintaining a consistent payroll. By putting these three tactics into practice, SMEs can improve their financial management, lower their risk of payroll disruptions, and give their valuable employees a stable and secure work environment.
According to Austin, “These strategies empower SMEs to navigate financial challenges with confidence and ensure their continued success in a competitive business landscape,”