How SMEs can improve cash flow when it comes to large clients

Small companies face many challenges while running their businesses, one of which is how to deal with customers who are major companies and who therefore have more economic weight.

In India, for instance, a consulting company worked on implementing a project for a large engineering company, with 20 of its staff positioned at various sites for more than a month. For its work, it billed the client INR15 million. And even after two years, this invoice remained unpaid.

What’s worse: this amount equates to an eye-watering 7.5% of the company’s total outstanding receivables, which total INR200 million.

With the Covid-19 pandemic, many customers are attributing their delayed payment of invoices to closed offices, inaccessible payments portals, and a shortage of employees. Another Indian company, a small manufacturing firm that supplies components to telecom and critical infrastructure public sector units, said its payment cycle has doubled compared to pre-Covid months.

Its owner said: “I can only push them so much. They can blacklist you from participating in any further tenders. They can dispute the invoice amount and reduce it. These tools have been used rampantly."

So, while buyers in India are legally mandated to make payments to a supplier within 45 days, the reality can be awfully different for smaller companies. Small businesses don’t have strong bargaining power while dealing with large companies, because they could risk losing clients who contribute the lion’s share of their revenues. They also typically have a much smaller working capital base, making them vulnerable to pressure.

What can SMEs like these do in such situations to improve customer intimacy and encourage prompt payment?

The answer lies in systematically applying the Virtuous Revenue Cycle to the 20% of customers who represent 80% of sales. That includes communicating clear payment and service expectations, and a carefully maintained process of customer intimacy with early identification of issues and their prompt resolution.

A customer who is liquid, ie not insolvent, pays some suppliers every month. Taken together, the elements of the VRC are designed to ensure that an SME who follows them carefully will be first in line to get paid and not consigned to the bottom of the pile.