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Managing small business cash flow is never easy. And when economic conditions take a turn for the worse, conserving cash becomes even more important than usual. For a while at least, it can overtake your normal focus on maximising your business profitability.
So how can you improve business cash flow — and do it without starving your company of the investment it needs or taking unfair advantage of suppliers and other partners?
In this article I’ve compiled a long list of techniques you can use to increase business cash flow. Some of them can help you get cash in quicker while others delay the point at which you pay cash out. A few are ‘emergency’ measures you might take for a limited period of time but many are just good ‘all weather’ business practices.
Most of these suggestions apply to B2B and B2C companies alike but some apply only to one or the other. The majority also have wide applicability but some are relevant only for some kinds of business. For example, ideas about receivables management are not relevant for most retailers.
As you read this article, you’ll see that a few of the suggestions would reduce your profit margins (e.g. offering discounts to customers in exchange for early payment). If your business is generating healthy cash flow each month, this would probably not be an option you should take. But if your company is facing a short-term cash squeeze, it could make sense.
So before you adopt any of these measures, make sure they are right for your circumstances.
If your company already has a healthy cash position and your top priority is to make your business more productive, I’ve written a separate article setting out suggestions for how to reduce your costs. I also recommend investigating ways to make your business more efficient by identifying and eliminating the hidden waste in many business processes.
If your company is facing a possible liquidity crisis, you may need to be very radical. Adopting zero-based budgeting and asking managers to justify why you should have any cash at all tied up in particular types of asset may stimulate the fresh ideas you need.
Here are my top tips for managing small business cash flow, organised by topic.
Be disciplined about which customers you supply and on what terms:
Avoid scoring own goals with your invoices:
Be innovative with customer payment options:
Manage your receivables proactively:
Optimise your supplier payment terms:
Be smart about how much stock you hold:
Reduce the cash tied up in fixed assets:
Research new customers before you agree to supply them
If you’ve dealt with a customer for five years and they’ve always paid you on time, this can give you comfort that they run a solvent business. You can’t drop your guard completely because things can change. You need to be alert if there’s a downturn in the industry they operate in. But all in all, their track record provides some confidence that they will keep paying you on time in future.
When a new customer approaches you, you don’t have any of that comfort. They have no track record with you. How should you decide whether or not to supply them and on what terms?
You should take a few easy steps to reduce the risk they pay you late or not at all:
Ask around in your industry. You may know one or two of their competitors — they might also be your customers after all. Has anyone heard bad things about their finances? Or does anyone know them and can vouch for them?
Do you know any of their former employees? Does any of them have anything positive or negative to say about the state of the business?
If they are an incorporated company, they have to file annual accounts at Companies House. Search for their most recent filing — it only takes a few moments. If they qualify for micro accounts they only need to file a balance sheet but this can be very informative:
Does the company have a very high level of trade payables compared with what you would expect based on the likely size of the business and the value of its annual purchases? This could indicate that management is paying its suppliers late.
Does the company have an excessive level of debt? This might indicate liquidity problems and the risk of slow or non-payment.
Have equity shareholders’ funds been increasing or declining? This doesn’t prove anything specifically — declining equity can simply reflect a very high level of dividend payments. But it could mean that the company has been only marginally profitable or even loss-making.
While you are on the Companies House portal, you can look up other information:
Has the company consistently filed its accounts on time or has it been late filing? At best, late filing is a sign that the company is disorganised. That would not be encouraging.
Are the directors of your potential new customer directors or shareholders of any other incorporated companies? Or have they been in the past? Have any of these companies ever been struck off, except voluntarily? Have any of the directors been involved in a company liquidation? Have any of the shareholders been disqualified from acting as a company director?
If anything doesn’t seem right to you, you may be better off passing on the opportunity to supply to this account.
If you do feel comfortable going ahead, it’s common practice to require partial or full payment up front for a first order. Once the new customer has built a track record of on-time payment, you can begin to offer normal trade credit terms.
Require stage payments on orders with a long cash conversion cycle…
Some customer orders have inherently long cash conversion cycles. That’s the time period between you laying out the money you must spend to deliver the result for the customer (e.g. buying raw materials) and the customer paying you for the finished product.
It’s important to be clear-eyed about how long your cash is going to be tied up. It’s better to be conservative because work runs behind schedule more often than it runs ahead of plan.
Focus especially carefully on the point of peak absorption of your cash — how large will that peak be and when will it materialise? Will you need a lot of cash to fund other projects at around the same time?
To mitigate your cash flow risk on orders with a long cash conversion cycle, negotiate stage payments and/or an upfront deposit. That way you can keep the drain on your cash within tolerable bounds.
In industries with a structurally long cash conversion cycle, stage payments are anyway common practice. In other industries where they are not the norm, they are nevertheless understandable on pieces of business that are out of the ordinary. For example:
Orders that are particularly large.
Orders that involve an unusually high level of customisation and will therefore take longer to complete than usual.
Orders that require the supplier pays a significant deposit to a sub-supplier to secure an order for key inputs that themselves have a long delivery lead time.
If it’s clear that an order is going to involve an unusually large financing burden for your company, lay out your analysis to your customer. If your logic is sound, a reasonable customer should agree to stage payments. After all, they are likely to face the same request from alternative suppliers.
…Or consider turning those orders down entirely
If your client won’t agree to a deposit or stage payments, you have a tricky decision to take.
The first thing to consider is the build-up of the costs you would incur to meet the client’s order. Analyse your budgeted costs between:
Incremental external costs (e.g. to buy raw materials).
Fixed internal costs for staff and allocated overheads that you will incur anyway.
Then ask: If I don’t accept the client’s order, will I be able to deploy my staff on other profitable orders? If you can deploy your staff on other business that might bring in a lower profit margin but will require less financing and bring customer cash in quicker, you may be best to accept the work with the better cash flow profile.
It might seem as if you are turning down a juicy profit on the other order but remember — that profit is just a forecast until you get paid. A lot of things can go wrong between now and then. You don’t want to gamble on an order that might put your entire company at risk.
If business is thin and you will otherwise be paying your staff to stand idle, you may have no choice but to accept the order without the requested stage payments. In this case, you will just need to plan to make sure you will have enough cash on hand to meet your liabilities as they fall due. Forecast your weekly cash position particularly carefully around the time when you expect the demand on your funding to peak.
Put a system in place to ensure 100% on-time invoicing
Submitting your invoices to your customers later than you could is an avoidable way to drain cash from your business.
First, review your Terms & Conditions for when you and your clients have agreed you can bill them. There are standard rules of the road in many industries. Make sure you’re not agreeing to invoice customers later than your peers normally do.
Second, make sure you invoice your customers as soon as you’re contractually able to do so. In some industries the invoicing process should be simple. In others (e.g. project-type businesses) it may be more complex. In any case, do the following:
Make sure it’s clear which of your staff is responsible for initiating the invoicing process on every piece of work.
Make sure the initiator doesn’t wait until the agreed invoice date to start the process if the invoice then has to be submitted into an internal approval system. Start the process in advance so that the invoice is ready to go on the agreed invoice date.
If your invoices need to be approved before submission to the customer, make sure they automatically go to the top of the approver’s In Tray/ Inbox. Appoint an alternate for every approver to cover days when they are off sick or on holiday. Put in place a penalty for any approver who takes more than 24 hours to approve or decline an invoice.
Put a system in place to eliminate all invoicing errors
Sending out invoices that contain errors or omissions is a common cause of late payments. It’s another avoidable own goal from a cash flow perspective.
Your first line of defence against invoicing errors is an effective, properly resourced finance and accounting department. Your accounts receivable team should be familiar with all your key customers — how they work, the T&Cs that apply to the account, their preferred payment method and so on. They should also be on good terms with their client accounts payable counterparts so they can quickly straighten out any problems that do arise before any payments are delayed.
Your accounting team should then aim for zero invoicing errors:
The format of your invoices should be simple and straightforward. All line items should be explained clearly to avoid any confusion around what is being billed. The two most prominent figures on your invoices should be the amount payable and the due date.
Make sure the due date for payment is consistent with the payment terms that were agreed via your T&Cs or direct negotiation. It should be easy for the client to reconcile the due date on your invoice with the agreed terms.
If appropriate (e.g. you operate in a project-based business, the order you’re invoicing is large or the payment terms you’ve agreed are complex), make sure your client account manager checks and approves the invoice before you send it.
Never include anything on an invoice that the client is not expecting. If you have accepted an order and then subsequently agreed to changes, it could be a good idea to run the amended details by the client a final time before sending it. That way you can provide any clarification or resolve any disagreement ahead of time and avoid delaying payment.
Be sure to send your invoice to the correct contact at the client using their correct email address. Your sales team should be responsible for keeping the client contact details in your CRM system up to date, but too often this is overlooked. Put in place a penalty for sales staff when client payments are delayed because the data in your CRM system are incorrect.
Offer customers a reasonable range of payment methods
Allow your customers to pay using a sufficiently wide range of payment options. Acceptable payment methods should be agreed upfront when your customer accepts your T&Cs.
The choices you give them should accommodate what is customary in your industry. B2B balances are normally settled via bank transfer. If it’s normal to accept card payments, you would need to offer MasterCard and Visa but there’s no obligation to accept Diners or American Express. Accepting PayPal is common in some industries but not in others. Similarly, with ApplePay and GooglePay.
The bottom line is: don’t give your customers a reason to pay your invoices late because of haggling over the method of payment.
Offer customers a discount for early payment
If you don’t already, consider offering your customers a discount for early payment. You will lose some of your profit margin but if your near-term focus is on protecting your cash position, it’s an obvious lever to pull.
Accept card payments for small value B2B invoices
Increasing numbers of B2B businesses are agreeing to handle small value purchases using payment card systems rather than following the traditional methods of an invoice, a credit period and a bank transfer. Payment cards are issued by traditional banks and other non-bank finance providers and usually use the main established card networks (i.e. Visa and MasterCard).
A payment card system works as follows:
Your customer issues payment cards to select employees and gives them authority to purchase specified categories of items for their own departments up to pre-set value limits.
When the buyer wants to buy, they contact you (online or via another channel), place their order and pay using their card. (For your customer, this cuts out the bureaucracy of raising a purchase order and having it approved by a manager).
You receive payment from the card-issuing institution in 1-3 business days instead of waiting for your customer to pay on your normal credit terms (e.g. 30 days).
By accepting card payments, you lose c.2-3% of the value of the sale in card fees. However, you eliminate the cost of chasing overdue payments and the risk of bad debts. You would only accept card payments for lower value transactions that account for a moderate share of your revenues but generate disproportionately high administration costs for you.
Accept card payments for small value B2C invoices
If you run a non-retail B2C business (e.g. trades such as plumbing, building or electricals or professions such as legal advice or surveying) you can offer the option of card payment without needing to agree it with your customers. There’s no change to your workflow.
When you email your invoice to your customer, you can simply include a link that enables online payment via your customer’s credit card as an alternative to payment via bank transfer. This assumes that your accounting software supports the option of card payment.
You will still face potential costs for chasing late payments and risks related to bad debts. Yet many businesses find that a card payment option results in customers settling their balances more quickly. That’s because payment by card is so easy that it prompts customers to deal with the issue on the spot and get it out of the way.
Identify and deal effectively with persistently late-paying customers
Review your list of overdue receivables regularly. Look out for any customers who have persistently paid you late. Get in touch with them immediately and find out the reason for the delay.
There are several reasons why a customer might repeatedly pay you late.
First, it’s possible that it’s your fault. Perhaps your standard of service has slipped without you realising and they’re unhappy about it. Maybe you keep sending them incorrect invoices or you’re not communicating the due date clearly enough. Whatever the reason is, you need to fix the issue and then make sure your customer still feels valued.
If the client can’t point to any fault on your side, they may instead resort to bluster, claim you have misplaced their payment or promise to pay you soon. In fact I can only think of three other reasons why a customer would consistently pay you late:
They are chronically disorganised.
They are doing it deliberately.
They can’t pay and may soon be bankrupt.
Politely explain to the customer the damaging impact that late settlement by them and others is having on your business. Tell them that, regrettably:
In future you will be applying the legally permissible surcharge (‘statutory interest’) for late payment to their outstanding balance. It’s currently the Bank of England base rate plus 8% p.a.
You won’t be accepting any new orders from them until they clear their overdue balance.
Once they’ve cleared their overdue balance, you will require a significant upfront deposit (say, 25%) on any new orders until they establish a solid record of on-time payment.
You might offend them but losing the customer might turn out to be a blessing in disguise. If they’re not happy to put up a deposit, you’re probably better off without them.
Always bear in mind that the prospective profit on small receivables can be quickly wiped out by the cost of the time spent by your staff chasing late payments. In the worst case, if an overdue receivable is large and a customer defaults, it could sink your whole business.
So hold onto your cash. Don’t plough it into orders for customers that take advantage of your trust and hard work. It’s just not worth the risk.
Put a formal system in place for chasing overdue receivables
We have just touched on how to deal with persistently late paying customers. But what about the larger number of individual invoices from otherwise sound customers that go overdue from time to time?
Late payments are often caused by simple misunderstandings and errors, with no bad intent at play. But someone needs to sort these issues out — they won’t fix themselves. And allowing them to linger is costly.
The solution is to put in place a formal system that ensures overdue balances are chased promptly and persistently. The best way to do this is to allocate the task to a single person and make reduction of overdue balances one of their key targets.
It’s vital to choose the right person for the job. They must be good with numbers and able to reconcile discrepancies between your company’s records and those of your clients. But they also need the right personal qualities. They must be tactful but capable of standing their ground. They should be a good judge of when they’re being told the truth and when someone is not being straightforward.
Once you’ve found the right person, don’t just dump a tough job on them and walk away:
Provide them with access to any extra training they may need.
Back them up. If they have exhausted all their options and they need to call in top management to engage with a customer directly, make yourself available to them. And always be on their side.
Celebrate their wins with the rest of your team. Make everyone see how important their role is.
Someone who is good at collecting overdue balances will probably pay for their own salary in recoveries quite quickly.
Release cash from receivables using invoice financing or invoice factoring
If you need to generate significant funds quickly, converting your outstanding unpaid receivables into cash immediately can be an attractive option.
There are two main ways to do this:
Invoice financing (also known as invoice discounting).
Invoice factoring.
There are many different ways to structure invoice financing and factoring that involve different allocations of risk and reward between you and your finance partner. But here are simple examples of how these processes often work.
With invoice financing, a finance company lends you up to, say, 80% of the face value of your outstanding customer receivables. As your customers settle their invoices, you repay the loan plus a fee to your finance partner to cover interest on the loan plus their operating costs and profit margin.
You retain control of the relationship with your customers — you chase overdue amounts and they normally won’t know you’ve borrowed against their invoices. If any of your customers default, you bear the cost.
With invoice factoring, a finance company buys your unpaid customer invoices from you. They might simply buy them outright at a discount to face value that covers their expected financing cost, default risk, operating expenses and profit margin. Or they might subsequently pay you the rest of the balance owed as your customers settle the invoices, minus their fees.
Regardless of the details, note that the factoring company takes over the relationship with your customer. If the customer is late paying, it’s your factoring partner who will chase them, not you. That might not be good for your relationship with your customers.
In practice, both financing and factoring arrangements are likely to continue on a rolling basis rather than represent one-off transactions. In other words, both solutions enable you to access the cash you will receive from your customers more quickly than if you waited for payment — at a cost.
Use every angle to negotiate better payment terms from suppliers
If you’re a manufacturing business or a service business that buys in a lot of outside inputs, you’ll usually have a significant outstanding balance payable to your suppliers. This is free money — your suppliers are helping to finance your business.
Could you increase your payables to suppliers? It could generate a meaningful amount of extra cash for your business.
If you’re an established SME, review the payment terms you have in place with all your significant suppliers. Investigate whether you could do the following:
Consolidate your buying across fewer suppliers to leverage your buying power more effectively and negotiate more generous credit terms.
Ask for better terms in exchange for a commitment to direct a guaranteed minimum annual volume of purchasing towards a supplier.
Ask your existing suppliers to re-bid for your business against the alternative possible suppliers, with an eye to securing better terms.
If you have any long-standing supplier relationships, you might still be working on the conditions you agreed when you first started buying from them. These might not be very favourable and you might since have built up an excellent credit record with them. If the terms are out of line with industry norms, it would be reasonable to ask to update them.
Tread carefully when approaching any suppliers who play a key role in helping you to differentiate your product or service in ways that are valuable for your own customers. You’re entitled to ask for a discussion, but you won’t want to damage any relationships.
Even if you’re a micro enterprise with no individual purchasing power, you should at least screen the market regularly to make sure you’re buying from vendors with attractive payment terms.
Once you’ve finished optimising supplier terms for the production side of your business, review the processes in your Sales, R&D, Finance and other business areas. These departments don’t have large external purchasing budgets but they should all buy from suppliers who offer attractive credit terms.
It goes without saying that you should never deliberately delay payments to your suppliers beyond the contractually agreed payment date unless there is a genuine dispute about the amount due. It’s unethical and also foolish — it might contribute to a liquidity crisis at a supplier you depend on.
Stop capitalising on early payment discounts from suppliers
If you usually settle your liabilities early to take advantage of supplier discounts but you’re facing a cash flow squeeze, stop doing it. You will face modestly higher unit purchase costs for as long as you pass up these discounts. But if your top priority is to conserve cash, it doesn’t make sense to be pushing payments out of the door earlier than you need to.
You can resume capitalising on early payment discounts at a later date, once the current pressure on your cash position has eased.
Take more scientific decisions about inventory re-stocking levels
If you run a manufacturing business, you will typically hold inventory of the raw materials and components you need to meet customer orders. If you run a service business, you might hold stock of a variety of consumables that you need for the same purpose.
When your inventory declines to a certain point, you will normally re-stock. How do you decide when to do it? Could you release cash that’s currently tied up in your inventory by taking better re-stocking decisions?
First of all, your re-stocking decisions should be based as far as possible on maths, not subjective judgment. If you’re a micro-enterprise and you’re managing your stock using an Excel spreadsheet, you simply won’t be able to capture and manipulate the relevant data to enable you to do that. You’ll consequently risk having far too much cash tied up in inventory.
Assuming that you’re running proper accounting software, you should be able to analyse your pattern of sales by product. How much of each product do you sell in an average week? What have been your peak weekly sales? Are you entering a seasonally strong or weak sales period?
Armed with this information, you should be able to compare the results with your inventory levels and make a reasonable estimate of when you need to re-stock.
Of course it’s not as simple as that in the real world. Your suppliers may have minimum order volumes or you might optimise shipping costs by placing orders for multiple lines at the same time, even if you don’t need all of them now. But you should at least avoid constant large over-stocking.
One problem with this approach is that it’s time consuming. Another is that it would involve manual calculations and an Excel spreadsheet — a process prone to errors. Finally, there is a limit to the level of sophistication you could apply — it wouldn’t be practical to map seasonality patterns onto dozens of different stock lines.
So the best approach, if you run an established SME with enough sales to make it economical, is to use inventory forecasting software. Good forecasting software analyses your historic sales patterns for every product line (including seasonal fluctuations through the year) and prompts you to re-order at the optimal time.
This means you can run with the lowest stocks possible yet at a level that’s consistent with keeping the risk of stock-outs to a very low level. Ideally, the amount of cash you release from inventory should pay for the cost of your software licence many times over.
Re-stock your inventory in smaller increments
If you face an urgent need to conserve cash, there are other levers you can pull to minimise the funds tied up in your inventory. We’ve just covered optimising the trigger levels at which you re-order stock. But you can also adjust the volume of new stock you buy when you do re-order.
Re-stocking more frequently in smaller increments may conserve cash at the cost of paying higher unit purchasing costs. But if cash is your priority, this may be a good option. You can use it as a temporary tactic until you’ve rebuilt your cash position and then revert to your normal re-order volumes.
Let’s consider the impact on your costs from this tactic, so that you can decide whether it makes sense to reorder in lower volumes:
Your purchase cost per unit would likely increase. The impact would partly depend on whether volume discounts in your industry are on a per order basis or on a cumulative annual basis (i.e. only the total volume you buy throughout the year matters, the individual order sizes don’t).
Your delivery cost per unit would increase. Breaking your annual purchases into a larger number of orders would almost certainly put up your shipping costs.
Your operating expenses would increase. Ordering items more frequently in smaller volumes would increase the workload on some of your departments, such as your goods inward team and your accounts payable team.
Your stock holding costs would decline because of lower borrowings to finance reduced inventory.
Identify stock lines you no longer use and sell them off
With your freshly minted analysis of your stock consumption in hand, you may find you’re holding stock items you simply don’t consume at all anymore. Perhaps you redesigned a product to incorporate different stock components. Maybe the stock item has been superseded by a new version that performs better or is more reliable.
Either way, you can now clear out any stock items you no longer use. Hopefully you can either sell them to second hand buyers or at least realise some scrap value from them.
Identify any unused fixed assets and sell them off
Do a thorough review of your fixed asset register for any items that you no longer use. Sell off the assets and realise whatever cash you can from them:
Plant and tools. Sell to second hand buyers if possible.
IT equipment. If technically obsolete, they may still have scrap value.
Office equipment. If in reasonable condition, sell to second hand buyers.
Postpone non-essential capex — but exercise caution
You can temporarily conserve cash by postponing any non-essential capital expenditure. This is one of the commonest tactics businesses use when facing a cash flow squeeze because it can have a significant impact on cash flow quickly.
If you do adopt this approach, proceed with caution. There is really no such thing as ‘non-essential’ capex. If it weren’t essential, you wouldn’t be spending the money at all. The capex is just not essential right now — you can delay it but not avoid it altogether.
For example, you can keep an asset (e.g. a company vehicle) running for longer than usual before replacing it. Or you can delay a project that was expected to bring efficiency benefits (e.g. replacing an old piece of manufacturing equipment with a new, more productive version).
But be careful not to delay capex on something that is crucial for maintaining the competitive edge of your company. For example, if you delay capex with the result that the quality of the product or service you provide to your customers falls behind your competitors, you may lose client orders. That would outweigh the cash flow benefit of delaying the capex — a classic false economy.
Outsource activities you currently perform in house — also with caution
When you carry out business functions in house, your ability to do so usually depends on having assets in place that support that activity.
Sometimes an outsourceable activity is very ‘asset light.’ An example is running Google Ads campaigns yourself rather than giving the task to a freelancer or agency. The only assets you need to run the ads are a desk, a chair and access to the internet.
However, processes on the manufacturing/ production side of a business tend to be much more ‘asset heavy’. If you were to outsource some of these activities, you might release a significant amount of cash that is tied up in the related assets.
Let’s take the example of a manufacturing business that assembles pieces of machinery out of components. Rather than buy all the components from sub-suppliers, the company makes many of them itself. If it wanted to permanently free up cash, it might be able to outsource the manufacture of those components to sub-suppliers instead.
This is how it would work. The company would identify a sub-supplier who could manufacture the components. Then it could sell the equipment it currently uses to that sub-supplier (to give them enough capacity to take on the extra business) or into the second-hand market.
If you decide to outsource production like this, make sure the process you are outsourcing is not critical to your competitiveness. If the process you would like to outsource involves specialist know-how that enables you to differentiate the finished product you sell to your customers, outsourcing would probably be unwise. You won’t want to hand a unique design or production know-how to a third-party supplier — it might end up becoming available to your competitors.
Switch to leasing assets instead of owning them
There are many assets in your business that you can either buy outright or lease. Examples include the property your company owns (factory, warehouse, office etc) as well as its vehicles, IT hardware and office equipment.
If you need to free up cash, consider switching to leasing as your owned assets, like vehicles and office equipment, come to the end of their lives. If you need to, you could even sell and lease back your property (akin to taking out a secured loan on the property).