Entrepreneur's Corner

The Devastating Impact of Delayed Payments: A Looming Threat to SMEs In Kenya

BY Steve Biko Wafula · July 2, 2023 11:07 am

KEY POINTS

The cumulative impact of delayed payments on SMEs can have far-reaching consequences for the overall economy. A weakened SME sector results in reduced job creation, diminished tax revenues, and slower economic growth, posing a threat to sustainable development and poverty alleviation efforts.

KEY TAKEAWAYS

Many SMEs operate on thin profit margins and rely on timely payments to meet their financial obligations. Delayed payments disrupt their delicate cash flow balance, leading to a vicious cycle where they struggle to catch up on payments and fulfill their commitments.

Delayed payments are a nuisance that most SMEs and Content creators are going through every day and this represents a critical and negative challenge to SMEs in Africa, particularly in Kenya.

The essence of time and the value of work done is fulfilled in the moment of payment. If you work and you bill, the amount you have invoiced represents the value of the work done and the time from the work done to the payment period. This time frame gives the money the right value that enables the payee to cater to their needs. Any delay and the money loses its value and purpose, and the payee makes a loss. This is something that few truly understand, showcasing why the law on delayed payments is still in the 16^th Century.

Delayed payments have emerged as a significant challenge for small and medium-sized enterprises (SMEs) in Kenya, posing a severe threat to their survival and growth.

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From my own experience, it is an issue that does not receive any significant coverage or attention and the majority of those affected, especially content creators, influencers, and suppliers have no way to have the matter addressed other than just wait it out and in the article, I will categorically elucidate why delayed payments are the worst possible factor that cripples SMEs in Kenya, through exploring the intricate details of this issue and its far-reaching consequences.

I believe I am not the only one suffering from this matter and hence the reason behind this is to try and create a conversation that can be positive and push the matters to those who can address it.

Related Content: Kenyan SMEs Urgently Need Kenyan Solutions

Imagine entering a store, selecting the items you desire, and when the time arrives to settle the bill, nonchalantly stating, “Thanks, but I’ll pay for these later,” before casually walking out with your chosen products. Such behavior would be unthinkable. However, why is it considered acceptable when it comes to paying small businesses that supply goods or services?

Surprisingly, this conduct seems to be tolerated, as our research reveals that over one in ten invoices issued to small and medium-sized businesses worldwide are settled OUTSIDE the agreed-upon payment terms. This amounts to an astonishing trillion dollars annually, encompassing payments that are either delayed or, worse yet, never made at all. In some instances, payments are so severely overdue that small and medium-sized businesses are compelled to write them off as uncollectible debts.

A significant part of the issue lies in the fact that many businesses fail to comprehend the repercussions of not paying their suppliers on time. Nevertheless, for small companies lacking the financial flexibility to absorb such costs, the aftermath can be catastrophic. Cashflow serves as the lifeblood of any business. Disturbingly, 40% of the small and medium-sized enterprises we surveyed reported experiencing direct and detrimental consequences from late payments. These consequences range from impeding future investments to reducing staff wages or even preventing the disbursement of Christmas bonuses. READ MORE ON THIS REPORT BY; SAGE; https://www.sage.com/en-gb/blog/wp-content/uploads/sites/10/2017/12/Domino-Effect-Late-Payments-Research-Sage.pdf

Money is the bloodline of any economy, and for businesses to thrive, its steady flow and circulation are critical. Increasing cases of delayed payments by both National and County governments and big brands to numerous businesses countrywide are alarming. Delayed payments impede the effective circulation of money in the local economy, adding excessive strain to businesses that are already balking under other local and global market factors. Here are my top reasons as to what this leads to;

Cash Flow Disruption:

Delayed payments disrupt the cash flow of SMEs, leaving them struggling to cover operational expenses, pay employees, and invest in growth opportunities. This creates a cycle of financial strain, hindering their ability to sustain day-to-day operations. If not addressed, leads to the death of the business and adds to the negative statistics of the ever-increasing unemployment rates.

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Working Capital Constraints:

SMEs heavily rely on a steady cash flow to manage their working capital needs. When payments are delayed, they are unable to purchase raw materials, maintain inventory, or fulfill customer orders, leading to operational inefficiencies and lost business opportunities. This is how SMEs end up being blacklisted by their suppliers and ultimately this leads to their winding up.

Reduced Profitability:

Delayed payments diminish SMEs’ profitability as they grapple with the financial burden of extended credit periods. This impacts their ability to reinvest in the business, expand operations, or develop new products and services. Given high inflation rates, government lending rates, and other fiscal policies, delayed payments mean SMEs ultimately make losses on their payments.

Increased Borrowing and Debt:

To mitigate the impact of delayed payments, SMEs may resort to borrowing money or taking on additional debt. This exacerbates their financial strain, as interest payments and loan obligations further erode their profitability and ability to grow. More debt means no profit at all because it’s akin to living from hand to mouth.

Relationship Strain with Suppliers:

Delayed payments from SMEs can strain their relationships with suppliers. Suppliers may become reluctant to extend credit or provide necessary goods, leading to disruptions in the supply chain and compromising product quality and timely delivery. This leads to blacklisting and other unprofessional conflicts that might render the SME into a bad terrain in their line of work.

Limited Negotiating Power:

SMEs often lack the bargaining power to negotiate favorable payment terms with larger corporations or government entities. They find themselves subjected to extended payment periods imposed by dominant players in the market, exacerbating their vulnerability to delayed payments. This is what SMEs in the content creation and influencing sectors in Kenya go through every single day.

Survival Threat to SMEs:

For many SMEs, delayed payments act as a silent killer, pushing them to the brink of closure. The inability to manage cash flow effectively and sustain business operations can force SMEs to shut down, leading to job losses and a negative impact on the economy. In Kenya over 3000 shut down every day because of delayed payments.

Opportunity Cost of Growth:

Delayed payments consume valuable time and resources that SMEs could otherwise allocate to strategic planning, marketing, and innovation. This opportunity cost stifles their growth potential and prevents them from seizing emerging market opportunities. The essence of opportunity cost is something that few people understand and delayed payments make it worse for SMEs and self-employed people.

Impacts on Employment:

As SMEs face financial strain due to delayed payments, they may be forced to downsize or delay hiring new employees. This has a cascading effect on unemployment rates and the overall socio-economic fabric of the country.

Entrepreneurial Discouragement:

Persistently delayed payments dampen the entrepreneurial spirit, discouraging aspiring entrepreneurs from starting new businesses. The fear of being trapped in a cycle of cash flow struggles and payment delays dissuades potential job creators from entering the market.

Stifled Innovation:

SMEs are often a breeding ground for innovation, driving economic growth and technological advancements. Delayed payments hinder their capacity to invest in research and development, stifling innovation and limiting the potential for groundbreaking solutions.

Non-compliance with Tax Obligations:

SMEs may face challenges in meeting their tax obligations due to delayed payments. This can lead to penalties, fines, and legal consequences, further exacerbating their financial woes. Actually this is an issue that both the Government and other key players seem to ignore. SMEs are law-abiding but in the face of delayed payments, there is little they can do to meet their statutory obligations and the end results are always negative.

Limited Access to Credit:

Delayed payments negatively impact SMEs’ creditworthiness, making it difficult for them to access loans or secure favorable terms from financial institutions. This lack of access to credit restricts their ability to invest in expansion, equipment, and technology upgrades.

Inefficient Dispute Resolution Mechanisms:

Disputes regarding quality, delivery, or contractual terms often accompany delayed payments. SMEs face challenges in resolving these disputes efficiently and fairly, further prolonging the payment process and adding to their financial burden.

Lack of Legal Protection:

In Kenya, SMEs often face limited legal protection and enforcement mechanisms when it comes to delayed payments. Lengthy legal processes and inadequate recourse options undermine their ability to seek a timely resolution and fair compensation for unpaid invoices.

Cash Flow Dependency:

Reduced Competitiveness:

SMEs facing persistently delayed payments find it challenging to compete with larger enterprises that have more robust financial resources. This imbalance stifles market competition and limits opportunities for smaller players to thrive and innovate.

Psychological Stress and Mental Health Impact:

The constant uncertainty and financial strain caused by delayed payments take a toll on the mental health of SME owners and employees. Stress, anxiety, and the fear of business failure create a negative work environment, affecting productivity and overall well-being.

Impact on Local Supply Chains:

SMEs often form a critical part of local supply chains, supporting the economy through job creation and contributing to economic growth. Delayed payments disrupt these supply chains, leading to a domino effect that affects multiple interconnected businesses and sectors.

Systemic Effects on the Economy:

Delayed payments present a grave threat to the survival and growth of SMEs in Kenya. The adverse effects on cash flow, working capital, profitability, supplier relationships, and overall business viability cannot be underestimated. Addressing this issue requires concerted efforts from all stakeholders, including policymakers, larger corporations, financial institutions, and SMEs themselves, to create an ecosystem that promotes fair payment practices and supports the sustainability and prosperity of SMEs, the backbone of any economy.

As Stephen Kelly, the CEO of SAGE says, …’ We urgently need to change the culture around payments. First, we must remove the stigma around chasing payment for the SMEs themselves. It shouldn’t be seen as embarrassing or rude to ask for money that you are owed. And secondly, businesses must recognize that every late payment has a material impact on a small business. It might mean one less bonus paid out. One less investment in innovative technology. One more pay cut…’

Small & Medium Businesses are the heroes of our economy – creating jobs and prosperity and knitting our communities together. So let’s treat them with the respect that they deserve – prompt payment. READ MORE on this here; https://www.sage.com/en-gb/blog/wp-content/uploads/sites/10/2017/12/Domino-Effect-Late-Payments-Research-Sage.pdf

I also believe there is a huge opportunity for banks and other financial institutions to plug into this conversation and see what can be done to help scale up SMEs’ growth and reduce the impact of delayed payment cycles every single time.

If you would like to engage with me further on this matter, please email; biko@sokodirectory.com or WhatsApp; +254 724 538 660.

About Steve Biko Wafula

Steve Biko is the CEO OF Soko Directory and the founder of Hidalgo Group of Companies. Steve is currently developing his career in law, finance, entrepreneurship and digital consultancy; and has been implementing consultancy assignments for client organizations comprising of trainings besides capacity building in entrepreneurial matters.He can be reached on: +254 20 510 1124 or Email: info@sokodirectory.com