Rise and fall: managing cash flow

Rise and fall
Rise and fall

Trading outside the Eurozone brings its own unique challenges for UK SMEs, not least having to manage cash flow in multiple currencies…

According to research from Western Union Business Solutions, the recent volatility in currency markets has left many SMEs unsure of how much they have paid suppliers until the payment date.

The good news is that the number of SMEs who do not know the exact invoice amount until it is paid is falling, with just a quarter (25 per cent) unaware, down from 29 per cent in September last year. The research posits that SMEs are being increasingly sophisticated in their FX hedging and risk management strategies with a growing number checking currency markets regularly, all of which indicates a growing awareness of currency movements and the impact this can have on cash flow.

But how exactly do currency movements impinge on cash flow and invoice payments? Martin Campbell, managing director of fintech start-up Ormsby Street, which has developed an online credit-check tool CreditHQ, explains: “In a typical scenario, because of the high costs and risks involved, a small business will tend to trade with an export customer only for a more worthwhile contract, ie a larger one. This means that the very first dealing an SME has with a foreign customer is likely to be an important one for the company’s cash flow, as well as its profit and loss account. It’s important to credit check potential customers, regardless of the country in which they reside – something that CreditHQ is working hard to make a lot easier – and also to monitor the ongoing performance of a company that you’re trading with over the life of that contract.

“When a customer does pay an invoice for that big important project, you may have some control over when the currency conversion takes place. If the currency has moved in your favour since the project started, then everything is good. But if currency has moved the other way, a small business is faced with a difficult decision. It may decide to hold off making the switch to pound sterling until rates improve, but this can place cash out of reach and cause cash-flow problems. If the business does go ahead and take the hit in order to release cash, then that can make a material difference to profit margins and mean that the additional cost and risk really didn’t pay off.”

In the next instalment of our Rise and Fall series we take a look at the disadvantages of hoarding cash…