Five ways to improve cash flow

Cash is the lifeblood of a company. By maintaining a healthy cash flow, you can ensure you have the money to pay staff wages, fund future projects and grow your business.

According to research by Intuit QuickBooks, 57% of UK business owners have experienced problems with cash flow and one in seven admit cash-flow issues have left them unable to pay employees.

If your business experiences cash-flow concerns, here are five steps you can take to fix the problem.

Establish your key cash-flow metrics

In order to tackle the problem you need to know what’s causing it. Establish key metrics including your debtor days average, the number of overdue invoices in your sales ledger and your outgoing expenses.

Once you have this data at your fingertips, you'll have a good idea of where the issues lie. Whether that’s credit control, overgenerous payment terms or a need for finance.

Improve your credit control

When customers pay their invoices late it can leave a gaping hole in your cash flow. By improving your credit control, you can get your invoices paid faster and free up cash from your aged debt. Here are some tips for improving your credit control:

• Start sending payment reminders to customers seven days before an invoice is due

• Send monthly statements to customers on longer payment terms

• Charge late fees on overdue invoices and continue to be proactive in chasing for payment

• Use a credit control tool like Satago to automate your payment reminders

Credit check your customers

There are several reasons why a customer might pay you late:

1. They’re disorganised and put off paying their invoices until the last minute

2. They're using their suppliers as a free credit stream

3. They’re facing financial issues or are on the brink of insolvency

The first of these can be solved with good credit control processes, the second and third point to a wider issue.

In 2020, the chairman of the Federation of Small Businesses, Mike Cherry, said that: “Sadly, some unscrupulous corporations are trying to inoculate themselves from the impacts of Covid-19 by withholding payments, or even freezing them, at the expense of small businesses.”

You can avoid being stung by companies with unethical payment practices by running credit checks on your customers and establishing their DBT average. A full credit report will also tell you if a customer is at risk of non-payment due to insolvency.

Once you have this information, you can decide whether or not to offer your customers credit. Remember, it’s better to walk away from a job than to work for a customer who could put your business at risk of non-payment.

Take on finance

Some business owners see borrowing as a last resort. But done the right way, acquiring finance can be an essential tool for improving cash flow and supporting your business’s growth.

If you have customers on 30+ day credit terms, invoice finance can be an effective way to unlock funds while you wait to be paid. You can use the cash to pay bills and win future contracts, while avoiding expensive alternatives such as credit cards and overdrafts.

For example, a digital agency wins a new contract and needs £20,000 to get the project off the ground. They haven’t got the money in their bank account, but they are owed £30,000 from a previous job that is due to be paid in 30 days. They decide to use invoice finance to free up cash from this unpaid invoice and use it to fund their next project.

Talk to your accountant

If you're struggling to balance the books, your accountant is best placed to offer you expert, impartial advice.

Whether you’re planning a new project and want to know the best way to fund it, or you’re struggling with day-to-day cash-flow concerns, your accountant can help you work out a plan that suits your business.