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Four steps to effective cash flow management.

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedOct 20223 min read

Cash is what keeps businesses going from one day to the next. Maintaining healthy cash flow is far too important to be left to chance. All companies need to practise robust cash flow management, especially SMEs. Here are some tips to help.

Understand what influences cash flow

Cash flow is the relationship between your income and your outgoings. It’s therefore influenced by four key factors:

Your pricing structure
The payment methods you accept
Your credit control/dispute management
Your ability to manage your outgoings

The better you optimise all four areas, the more effective you will be at managing cash flow.

Optimising your pricing structure

Do everything possible to encourage customers to buy from you on a regular, predictable basis. The easiest way is to offer them some kind of service or service bundle.

For example, if you sell products, offer your customers a guaranteed monthly supply on their preferred date in return for a weekly or monthly subscription. If you sell services, then structure your pricing to favour customers who commit to regular billing.

If neither of these is possible, consider running a loyalty programme. Set the terms of the loyalty programme to benefit customers who spend with you regularly. If you offer credit, make a point of taking a meaningful deposit up-front.

Optimising the payment methods you accept

One of the keys to smooth cash flow is reducing or eliminating friction in your payment system. The payment channel with the least friction is indisputably direct debit. This is because your customer simply has to set up a mandate. After that, you take care of everything else.

Direct debits reduce friction for business too. Set them up in advance to charge on a specific date. The charge is a one-off or can repeat according to your preferred schedule. If you use GoCardless, you can manage your direct debits from your accounting package. This means that they are charged and reconciled automatically.

One advantage of direct debits compared to card-on-file payments is that customers rarely change their bank details. What’s more, if they do, they often use a switching service that updates the details. If they do need their details updating manually, it’s possible through GoCardless.

Optimising your credit control/dispute management

Good credit control starts with knowing your customer. If you know your customer, you understand what payment terms they can reasonably manage. For example, if you offer instalments, you know how much to take as a deposit and how much to charge monthly.

Your choice of payment channel also influences how easy it is for you to control credit. For example, if you use direct debit, you eliminate issues caused by people just not getting around to paying on time.

Dispute management essentially depends on understanding the rules of your payment-acceptance channels. It follows that the more payment methods you accept, the more sets of rules you need to understand and vice versa. This means that it makes sense for merchants to offer fewer payment methods rather than more, especially for SMEs.

Optimising your outgoings

This is probably what most people think of first when they think of cash flow management. This is understandable as it’s a key part of managing cash flow. Here are some tips to help.

Appraise your needs and wants proactively

The further ahead you plan, the more time you give yourself to find the most economical way of getting what you need or want.

Use purchase orders

There are three main ways that using purchase orders helps with cash flow management. Firstly, it encourages you to think ahead and negotiate with suppliers. Secondly, it helps you to maintain internal control of purchasing without creating bottlenecks. Thirdly, it lets you use three-way matching for extra security.

Prioritise access over ownership

Assets may look good on your balance sheet but cash in hand and at the bank is what pays your bills. Leasing or renting and opting for ‘as a service’ delivery can all help to make your cash flow smoother.

Make payment terms work for you

If suppliers offer early-payment discounts, then use them if possible. If they don’t, pay whenever is convenient for you. Just make sure that you always pay by the invoice due date.

Have a business line of credit or credit card

There are likely to be times when your cash flow isn’t as smooth as you’d like it to be. Having a business line of credit or credit card can help to get you through those times.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.