In the UK, the average SME is owed around £63,881 in late payments, while 11% of British SMEs are owed more than £100,000. That’s a real issue, with many businesses struggling to deal with the cash flow problems that result from an industry-wide culture of late payments.
Cash flow is the lifeblood of any organization. It’s what enables your business to operate, covering expenses like rent, payroll, materials, and loan payments. If you run into issues with cash flow, there’s a chance that your business could end up joining the other 50,000 UK businesses that are forced to close each year because of late payments.
Fortunately, there are lots of ways that you can increase cash flow in a small business, from reviewing your pricing to providing customers with an easier payment process. So, without further ado, here’s our top 7 ways to improve your cash flow:
1. Consider switching to cloud accounting
Moving to a cloud accounting platform like Xero could be one of the most effective ways to improve cash flow. That’s probably why 38% of UK organisations have already made the switch. For a start, you’ll gain access to real-time data, ensuring that your cash flow forecasts are based on the most up-to-date financials available. In addition, running your finances on the cloud enables you to connect from anywhere in the world and stay dialled in to your cash flow, 24/7.
2. Beef up your payment terms
How strong are your payment terms? If you’re encountering regular issues with late payments, it may be a good idea to revise your payment terms. Many customers still use the traditional 30-day payment term, but that’s not the only option. Zero day, 7-day, or payment on receipt could all help to cut down on late payments, although you’ll need to warn your customers before making the switch.
3. Review your pricing process
When you’re working out how to improve cash flow, don’t forget about pricing. Look for inefficiencies in your operational costs, the size of your product range, or the number of employees to see if you could potentially be bringing in higher revenues with lower overheads. You should also examine your existing fee structure, making it as transparent as possible for your customers. Finally, it’s a good idea to review your invoicing process, as the sooner you can send an invoice, the sooner you can get paid and keep your cash flow ticking over. When it comes to cash flow, you can’t afford to be sluggish.
4. Optimise debt management
There are several ways to improve your debt collection process. Use automatic credit control tools like Chaser or Debtor Daddy to receive detailed reports on outstanding payments and send automatic chasers to your clients. It’s also a good idea to prioritise debts and chase up the biggest debtors, while producing regular aged debtor reports can give you a real time overview of how much you’re owed by customers. Also, consider using invoice factoring – a type of invoice finance where you sell outstanding invoices to third-parties – as a way of stabilising revenue and boosting cash flow.
5. Start leasing, not buying
For small businesses, leasing equipment, supplies, and real estate could make more financial sense than buying, particularly if you’re worried about how to improve cash flow. Generally speaking, buying costs more, so by leasing, you can maximise cash flow and ensure a steady stream of money that can be used for your business’s daily operations.
6. Review your inventory
Many businesses have a significant amount of cash tied up in inventory that they can’t seem to sell. Consider getting rid of these products, even if you have to sell them at a discount, to maximise cash flow and boost your company’s cash reserves.
7. Make it as easy as possible to get paid
If you’re trying to work out how to improve cash flow from operations, revising your payments process could be the most effective option. By taking payments via Direct Debit, you can stay in control of the payments process and receive regular, on-time payments every month. Plus, an automatic payment system like GoCardless reduces the amount of admin for the customer, incentivising them to make their payments as quickly as possible.