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News • 2024-05-03

9 Steps to small business cash flow improvement


Higher interest rates and concern over economic conditions require small business owners to implement measures to improve the business’ cash flow. Below are my best nine steps to take:

1. Maximise goods and services paid for by customers/clients before they are received and as they are received and minimise those which are paid for on credit. We pay airlines months before we fly, pay the doctor at the time of consultation and pay the restaurant at the time of eating, so people are flexible in when they pay. They just need to get into the habit of paying your business sooner.

2. Extend credit only on a case by case basis. New clients and customers and those without a good payment history should not get credit or should receive shorter terms that those with a good track record. Be firm with credit limits which are in place and introduce them to if they don’t currently exist. People need to earn the credit they are provided. Credit should be accompanied by solicitor provided documented terms which provide your business with a personal guarantee if the customer/client is a company and cover the charging of interest and collection costs if payment is late or in default. How you enforce these tools at your disposal is a separate issue.

3. Reduce the amount of credit your business provides. These measures can include reducing credit terms, from 30 days to 14 or to 7 days. Introduce or increase cash deposits. This is easy to justify if you have costs which you need to incur prior to completing what is provided. Invoice as work progresses or if goods are supplied over a period of time, rather than invoice everything on completion. These measures will reduce the amount which is owed to your business overall.

4. Invoice correctly and promptly after providing goods or services. It is always best to invoice while the memory of the great service or product is fresh in the consumer’s mind. Unfortunately, small errors or overcharging in invoices often delay the whole payment and not just the part which is doesn’t seem right.

5. Consider how third parties can offer credit to your customers/clients rather than your business. At its simplest, this is offering credit card facilities. Many facilities allow for the on-charging of the applicable fees to the customer/client. Some businesses can utilise “afterpay” type facilities where the business is paid by a financier and the customer pays off the purchase to them, not to the business. Some professional service providers can utilise fee funding facilities so their business is paid by the financier and the client pays the financier over a period of time.

6. Follow up payments promptly and firmly. If your terms are 7, 14 or 30 days, then start the follow up process the next day, not after another period of time. Don’t have 30, 60, 90 days on statements – that is just showing the extent to which t you tolerate late payment. Statements Just have due or overdue on statements to show that they are the only relevant statuses for payment as far as your business is concerned.

7. Keep your accounting system tracking receivables accurate and up to date. You can’t monitor or follow up customers/clients promptly if you don’t have a system which is up to date and correct. The maintenance of this system needs to be a priority for your business, and it may require a new or a dedicated employee or it may need to be outsourced. Some modern accounting systems generate automated or semi-automated follow ups and they should be evaluated for your business.

8. Pay your suppliers on time. While it might sound counter intuitive, paying your suppliers on time is a long term strategy of a successful business. Paying on time allows you to secure any prompt payment discounts; it allows you to ask for prompt payment discounts if they are not currently on offer; and it entitles you to ask for better terms and conditions (see next item).

9. Renegotiate supplier terms or suppliers. If you have a history of punctual payment, you should feel entitled to seek better terms from your suppliers. This can be to ask for a bigger prompt payment discount, to receive a prompt payment discount and for longer payment terms. This could also be a good time to evaluate the pricing and payment terms of alternative suppliers.


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