Firms paying price for cash flow woe

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Businesses across Yorkshire are trapped on a late payment merry-go-round as they try to reconcile time spent maintaining a healthy cash flow with fighting the on-going downturn, according to new research from Bibby Financial Services.

Almost two out of five Yorkshire businesses have been forced to accept extended payment terms from customers during the past 12 months, says Bibby.

As a result, businesses are in turn squeezing their own suppliers to bridge the resulting cash flow gap with a similar proportion asking suppliers to wait longer for their invoices to be settled.

However, Bibby warns, with the delayed European Late Payment Directive due to come in to force in March next year, businesses have just under a year to clean up their act and get payments under control in line with the new regulations.

The directive caps maximum contractual payment periods at 60 days and Bibby says firms that have agreed longer terms with suppliers to offset the delay in customer payments are in danger of non-compliance as they struggle to bring payment cycles within the legal requirements.

Bibby says one in five Yorkshire firms offer payment terms beyond 60 days on their invoices as matter of course, and with 35 per cent typically having to wait at least a month beyond agreed payment terms to get paid, businesses are putting themselves under real pressure when it comes to balancing the books.

Mark Storey, from Bibby Financial Services Yorkshire, said: “Over and above the need to clean up their act with the Late Payment Directive on the horizon, taking a ‘Rob Peter to pay Paul’ approach to late payment is not good business practice when it comes to managing cash flow. Despite 24 per cent of the businesses we spoke to agreeing that extended payment terms have had a negative effect on their cash flow management, unfortunately, many firms feel they have no choice but to join the late payment merry-go-round as they struggle to keep customers happy and treat suppliers fairly.”

Bibby has also identified what it says is a clear North-South divide, with businesses in the North West, North East, Yorkshire and Humberside and the East Midlands having to wait longer for payment than those in the South West, South East and East Anglia.

In addition to extending their payment terms, some 24 per cent of businesses in Yorkshire have had to take out external funding to bridge the cash flow gap creating further financial pressure on local businesses already feeling the squeeze from the economic downturn.