SME Accelerator: 20 tips on easing cashflow

In the good times, growth was the watchword, but now cash is king - which affects everyone from the CEO downwards.

by Steve Lodge
Last Updated: 31 Mar 2014

For small and fast-growing firms, not keeping tabs on cashflow can mean the demise of an otherwise healthy business. The dicey economic climate means it is harder than ever for small firms to get finance and when they do it often comes at a price, as the cost of loans continues to soar. If businesses have no cash in the bank and can't pay their bills, equally hard-up creditors will consider calling in the liquidators. What's more, the law's not on your side: trading while not having a reasonable idea of how bills are going to be met is unlawful. Poor management of cashflow is said to be the prime reason for small firms failing and more than 10,000 UK businesses fold each year because of late payment of monies due. Steve Lodge presents 20 tips to make sure you're not one of them

1. Bill promptly

It may be all too easy to be distracted by the next job, but it's important to issue invoices promptly once work is done. Customers are going to pay only if they actually receive a bill. Consider having a system for sending out invoices, say, within 24 hours of a chargeable event. If you have a system in place for producing immediate invoices, you are arguably also in a better position to ask for payment on delivery. Use first-class mail and on very large accounts phone the customer to confirm that invoices have been received.

2. Agree terms upfront

If you can get paid when an order is placed, on completion or delivery, then all the better. But getting paid so quickly may not always be possible - in which case you should at the very least find out when your customer plans to pay you. Ideally, you should seek to reach agreement on acceptable payment terms in advance and confirm these in writing to avoid disputes down the line. Your firm should also have its own defined credit policy, and you should make customers aware of this in the absence of other agreement. When taking on bigger and longer-term projects - or clients - agree a regular payment schedule rather than letting the full amount build up to completion of the job.

3. Stalk those payments

Chase up monies as soon as payment becomes overdue, and even consider sending a reminder two weeks before the official due date. Maintaining timely collection practices and regular communication with your customers can help avoid problems snowballing, and it is worth planning to accommodate some collection activity time every week.

4. Offer early-payment incentives

Even a discount of 1% to 2% might make all the difference. A discount against future work for prompt payers might also be worth considering. A note of caution, however: bear in mind that some customers are likely to be good payers regardless, so offering them a discount may fuel more price negotiation.

5. Avoid slow or non-paying customers

Do your homework, particularly with significant customers. Ask for and check credit references; contact other businesses that have had the same client; consider paying for a credit check from the likes of Dun & Bradstreet or Experian. Negotiate deposits or staged payments for large contracts. If the customer can't even come up with an initial deposit, it may be worth turning the job down: consider the time you might have to spend collecting payment later.

6. Employ a credit controller

Inevitably, there will be customers who won't pay on time and who seem to pay only when it suits them or after you have hassled them. Having someone on staff with responsibility for reducing overdue monies could help avoid sales staff putting relationships at risk by chasing debts.

7. Cash in your invoices

Selling your invoices to a factor means you are paid when the invoice is first presented. The factoring firm then collects payment, which saves you time on credit control, freeing you up to focus on service and sales. However, businesses normally receive only 80% or less of the value of their invoices upfront - more when the factor receives payment - and typically incur costs of up to 3% for collecting the monies, plus an interest charge on the cash advanced.

8. Charge interest on late payments

Many businesses see charging interest as a last resort for getting invoices paid, as they risk losing a customer or precipitating a dispute with a major client for what may be a small amount. Even so, under the 1998 Late Payment of Commercial Debts (Interest) Act, businesses can claim interest on overdue monies at Bank of England base rate plus 8%. Debt recovery costs of up to the equivalent of EUR40 can also be claimed, although if other businesses in your industry don't charge interest it may not be sensible for you to do so. Go to for advice.

9. Use cashflow forecasts as a business tool

A cashflow forecast should help you identify peaks and troughs in your bank balance and so help planning - particularly for borrowing. It should identify the source and amounts of cash coming in and the destinations and amounts going out of your business over a period, and be updated in line with actual performance. Accounting software will do the number-crunching, including what-if calculations. The key is to use the forecast as a business tool: to give advance warning of potential cashflow problems and to ensure that you have enough money to pay bills and so avoid late-payment charges. Banks often require a cashflow forecast before considering a loan.

10. Dip into your personal savings

This is probably the cheapest way to improve cashflow in the short term. While you miss out on interest on your savings, this cost is likely to be much lower than the debt interest your business would be incurring on this funding. Alternatively, you could draw less money out of the business - perhaps by taking a reduced salary.

11. Loans for longer-term borrowings

A business loan rather than an overdraft can be sensible for longer term borrowings, but make sure you shop around. Interest (on loans and overdrafts) is tax-deductible. Consolidating loans can make sense if you have existing debt at high rates and will also often improve cashflow by reducing monthly repayments in return for a longer loan term. Consider using a finance broker such as

12. Negotiate payment terms with suppliers

Ask your suppliers for extended credit terms: giving incentives such as large or regular orders could help. In some cases, buying on sale or return may be an option. Suppliers could even be open to barter deals, helping your business preserve cash. Some suppliers may also offer a discount for early settlement of bills.

13. Schedule payments to suppliers

Unless there is a discount for early payment, in general you should look to pay suppliers as late as possible. Having said that, there may be valued suppliers you want to pay earlier for fear that they won't deal with you again. Consider arranging a payment schedule that eases the strain on your finances so that all bills aren't due at once.

14. Use overdrafts and credit cards for short-term borrowing

An overdraft is likely to cost more than a loan for long-term purchases, but its flexibility - you can borrow a precise amount just for the time that you need the cash - makes it good value for shorter-term borrowing. Overdrafts are generally quick to arrange, but exceeding the agreed limit means high charges. Similarly, credit cards can be a blessing to get quick, short-term access to loans. With most credit cards you will have a few weeks in which to pay off your bill before any interest starts accruing. And some cards will have a 0% introductory offer lasting a few months - although if you don't repay your balance at the end of this period, you'll be hit by hefty interest costs.

15. Keep inventory low

Don't buy inventory based on hopes and dreams. Consider, for example, ordering less stock but more often. Use the 80/20 rule - 80% of revenue is generated by 20% of stock items. How much of the rest can you justify? Be ruthless - wouldn't a choice of 10 widgets priced between 10p and 30p be better for both you and your customers than your current range of 30? Remember that money spent on stock is cash you can't save - or spend on something else.

16. Stick to budgets

Know what you're going to spend on company supplies and new equipment and stick to it - don't overspend on non-essentials. Control overheads, add employees cautiously (especially given the current economic uncertainty) and make sure staff aren't spending you into difficulties.

17. Lease assets to cut commitment

Leasing gives the use of an asset without paying for it all at once - in effect, you pay for the asset with the income it generates. It's a rental agreement; almost anything can be leased and contracts are flexible and can be tailored to your needs. Lease payments - which are usually fixed, helping cash management - are generally tax-deductible as a business expense, which is handy.

18. Respond to tax carrots/sticks

Many financing arrangements can be treated as business expenses for reducing taxable profits. But there are also other potentially attractive tax breaks such as capital allowances for plant and machinery - where 100% of cost is tax-deductible in the first year - and the ability to multiply R&D costs by up to 175% for offsetting against taxable profits, but make sure your R&D falls within the definition. As well as these tax carrots, respecting tax deadlines will save on penalties.

19. Consider the bigger picture

Selling products that lose money will inevitably put a strain on cashflow and so may make no sense. But don't rule out selling off a product line or a highly profitable part of your business to improve your overall financial position. Disposing of equity may also be worth considering - but beware of undervaluing your business.

20. Lead from the front

If you are the boss, you can create a mythology around the importance of cash management. It worked for legendary GEC boss Lord Weinstock, who was famous for his impromptu demands for the saving of insignificant sums or quibbling over the price of a few beers on someone's expenses. Of course, his real motivation was not the specific instance but the general principle that the corporate watchword was thrift. It could work for you, too - make a few calls, bend a few ears and the message will spread like wildfire.

Finance Misc

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