Cape Town - Large companies and government organisations are taking longer to pay small and medium enterprises (SMEs), creating significantly higher credit risks for small companies, Cape Business Times quotes Coface operations director Jacqui Jooste as saying.
CAPE BUSINESS TIMES | FIN24
This is a trend both in South Africa and globally.
Cape Business Times says in an article that statistics released by the National Treasury show that in March 2012, municipalities owed their creditors R1.4bn more compared to the R9.7bn at the end of Q3 2011.
This report reflected that in the Free State 63% of debt owed to creditors was older than 90 days, for Limpopo it was 56.3% older than 90 days, while the corresponding figure for the North West was 44.7%.
Due to their lower overheads, SMEs are generally more competitive in their pricing. As a result, they are often considered in preference to larger companies.
When an SME is approached by a large customer or by government to quote or tender, it will do so at the best possible price. However, what the SME often does not take into consideration is the cost of credit, should the terms be extended, Jooste says.
If the customer contributes a large percentage to the SME's turnover and delays payment or - even worse - defaults in payment entirely, it could have a serious effect on the business.
While this is not only applicable to SMEs, smaller companies are particularly vulnerable because they generally do not have the cash reserves to fall back onto in the event of non-payment.
The effect on the SME's business is further aggravated because management's focus is on collecting the money that is overdue, making it easy to lose focus on the day-to-day business.
In tough economic times, sales and ultimately growth are top priorities for businesses to cover overheads and make profits.
But it is important to ensure that sales and growth are not chased at the expense of profit, says Jooste. – FIN24