Making ends meet is a core principle of good business. But to keep the wheels turning, we need money in the bank to pay suppliers, bills and staff.
Worryingly, poor cash flow is among the biggest challenges currently facing small businesses in the UK. Between late payments and unfair payment terms, poor cash flow attributes to thousands of small business deaths each year.
According to one study, 78 per cent of all UK small and medium-sized businesses that are owed money are being forced to wait at least one month beyond agreed payment terms. Around four in 10 of those say large businesses are the worst offenders.
A third (34 per cent) of SMEs, meanwhile, rely on overdrafts to cover the monthly costs of doing business, while 43 per cent spend even more cash chasing down late payments.
Evidently, the odds of survival are stacked against small businesses. So, what can we do to rebalance them in our favour?
In this blog, we will explore just four ways we can make an immediate positive impact on the health of your cash flow.
Review payment terms
If you’re struggling to keep on top of cash flow, your payment terms might be letting you down. Payment terms and conditions are the most powerful tools in your business arsenal to boost cash flow and stay in the black.
Do you incentivise early payments? By encouraging customers to pay early, we can ensure that cash is flowing throughout the month. So, how’s it done?
The most common incentive is the promise of discounts. For example, if a payment is processed within 10 days of an invoice being issued, you could offer the customer a two, five or even 10 per cent discount. Always assess what impact this will have on profitability and ensure incentives are not abused.
Your next job is to deter late payments. This is achieved by setting out penalties for payments after the agreed payment date. A late payment penalty is usually worked out as a percentage of the total invoice value, known as interest. According to legal guidelines, interest and debt recovery costs can be claimed on business transactions 60 days after an invoice is issued.
While you can choose a lower interest rate, the statutory rate is eight per cent plus the Bank of England base rate. Debt recovery costs, meanwhile, are fixed depending on the amount you are attempting to recover. See the below table for costs.
|Amount of debt||What you can charge|
|Up to £999.99||£40|
|£1,000 to £9,999.99||£70|
|£10,000 or more||£100|
With any business deal, setting out clear payment terms and conditions is best practice. Get in touch to find out more about how late payments can be easily avoided.
Rather than buying plant, machinery and equipment outright, leasing can benefit businesses by reducing the up-front cost and instead spread it out over an agreed period of time. Regular, fixed monthly payments are much easier to deal with and account for, particularly where forecasting is involved.
The second benefit of leasing is having liquid cash in your bank, rather than having it tied up in inflexible fixed assets. If a lack of available cash is a problem for you, leasing may be the answer.
Learn more about forecasting by clicking here.
Payment processing technology is constantly evolving. Thanks to the latest innovations, small businesses can efficiently and affordably carry out credit checks against prospective customers and make better-informed decisions about doing business with them. Credit reports can be purchased from the three major credit checkers, Experian, Equifax and TransUnion, as well as other suppliers.
Digital invoicing technology can also boost cash flow. Software providers, such as Xero, Quickbooks and Sage, offer accessible online invoicing solutions designed to help you get paid faster. Automatically generated digital invoices make paying bills easier than ever. Customise the appearance of your invoice, make your payment terms clear, and include a handy link for customers to pay straight away.
According to Xero, small businesses who enable Stripe payments (a third-party digital payments solution) on invoices are paid, on average, 15 days faster than those who don’t.
“Giving your customers more ways to pay makes it even easier for them to do business with you, and saves time and hassle for everyone,” says Xero.
Automated invoicing software also takes the work out of chasing payments by sending regular invoice reminders. Just set how and when they should be sent.
Poor cash flow can be a symptom of poor costs management. Whether it’s the cost of raw materials, the cost of suppliers, or the cost of distribution, there is always room to negotiate.
Use management accounts to pinpoint where you might be overspending and work from there. For example, cutting costs on the factory floor might include selling – rather than recycling – leftover resources or relocating to a more economical site.
Businesses can also save thousands by comparing insurance, energy and loan deals. If your contracts automatically renew, you could cut your monthly outlay by manually reviewing them. According to price comparison website Switch my Business, the average business can save £1,235 a year by comparing deals. Meanwhile, Government figures suggest that savings of some 39 per cent are possible through efficiency improvements in commercial buildings – representing more than £3.7 billion in savings nationwide.
And what about eliminating physical space and equipment altogether? Advances in cloud-based technology mean functions such as cloud accounting, outsourced HR and even virtual meeting rooms are now viable options and increasingly common business practices.
Don’t forget, it’s best practice to review your suppliers at least once a year, ensuring you are bargaining for the best deal. After all, they need your custom as much as you need theirs. Learn more about management reports and costs management by clicking here.
We work with business owners to build the businesses they need to have the life they want, so if you want to talk about how to grow business, get in touch with me on 01803 296678 or email firstname.lastname@example.org