As you well know, the credit constraining impact of the Irish Banking Crisis is being felt 10 years later.
SME’s are definitely feeling this constraint. The latest figures from the Central Bank of Ireland show that SME loan rejection rates increased to 13.9% in September from 8.2% in March 2017.
The Central Bank’s SME Market Report for H2 2017 also reveals that the SME lending market has become more concentrated in the last 6 months with fewer banks holding an ever larger market share. The market share of the three main lenders in new lending flows is currently 82%.
There are alternatives to the pillar banks. The first place to look is within your own company. It is very likely that you have a lot of capital tied up in receivables and stock that you could turn into cash by challenging your working capital practices.
What are the typical “mistakes” in working capital management?
A number of years ago I read an article in the Harvard Business Review that set out the 6 classic mistakes made in working capital management. These will apply to and resonate with SMEs today. Below I have summarised the key mistakes identified in the article and how you can avoid them:
1 Managing to solely the Profit & Loss Account
A supplier offers you a bulk discount on stock. This can flatter your cost of goods sold but is really an unaccounted cost via the drain on your liquidity slowing your asset turn. Discounts are not a free lunch.
2 Rewarding Sales People for Sales Alone
Similarly, offering credit terms is a standard feature to drive sales. However, the cost can be more than you think and not necessarily reflected with clarity to your staff. What is the true opportunity cost of that unit of capital sitting in receivables? What could you do with it if turned into cash today?
Sales people will always look for ways to get customers to buy. They grant generous payment delays. They also overstock lines for fear they upset a customer with a stock outage. This all has a cost that must be interrogated,
3 Over Engineering Quality in Production
Are you sure that the incremental drive for quality and features within products are being correctly remunerated in your pricing? Are they truly valued by your customers?
4 Tying Creditors to Debtors
Creditors and Debtors need to be managed separately to their own conditions and imperatives. Relative bargaining power, the nature of competition, industry structure and switching costs will ultimately determine the terms that a company can dictate to its customers or must accept from its suppliers.
5 Fallacy of Current Ratio
Bankers want to ensure that companies have enough liquid assets to repay their loans in the event of a problem. They will look for a high current ratio. This can have a perverse effect. This is because a higher current ratio value is achieved by having higher levels of receivables and stock and a lower level of payables – all quite at odds with sound working –capital practices.
6 Benchmarking against your Competitors
It is self evident somewhat to beat your competition and sustain higher returns on capital you have to do something different. Be it fast fashion supply chains in retail or airlines selling tickets direct.
Consider establishing a “cash cabinet” with champions from every functional area of your business mandated to drive creative ideas to improve cash flow across the whole organisation.
The innovative product offering of InvoiceFair can remove and mitigate many of the above issues and put you in control of your cash flow. Release cash locked in receivables by trading them on InvoiceFair’s platform. Since commencing trading in April 2015 Invoicefair has funded Euro 250 million of working capital across a variety of industries from manufacturing to medical technology.
For a fast and efficient consultation on how we can accelerate your cash flow contact the business development team at – Sorcha@invfprod2.northeurope.cloudapp.azure.com
To review the full HBR article I have referenced you can find it here: https://hbr.org/2009/05/need-cash-look-inside-your-company