Last editedJun 20236 min read
To increase cash flow, combine strategies to boost revenue and reduce costs. On the revenue side, consider increasing sales, diversifying offerings, raising prices, and incentivising early payments. Consider Direct Debit for predictable income, especially for recurring payments. On costs, cut unnecessary expenses to streamline operations, negotiate with suppliers, and manage inventory efficiently. Optimise budgets, maintain an emergency fund and make wise investments to improve cash flow.
In the UK, the average SME is owed around £250k in late payments. 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 organisation. 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 estimated 400,000 UK businesses that were forced to close in 2022 because of late payments – numbers that show the severe impact of the 2020 pandemic and subsequent declining macroeconomic scenario.
Cash flow issues can also have a profound emotional impact on businesses. They lead to stress, anxiety, and worry for business owners and stakeholders. The constant struggle to meet financial obligations, pay employees, and cover expenses can take a toll on mental well-being. The lack of adequate cash flow hinders growth opportunities by restricting investment in marketing, product development, and infrastructure – preventing businesses from expanding and staying competitive.
Fortunately, there are many ways to increase cash flow in a small business, from reviewing your pricing to providing customers with an easier payment process - here are 7 ways to improve your cash flow.
1. 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 control the payments process and receive regular, on-time payments. Direct Debit is a bank payment rather than a card payment, so it is more convenient for your customers, as they don’t need to update lost or expired card details. GoCardless Direct Debit even works with invoices, meaning you can issue invoices at different times for different amounts and be paid on the due dates set by you.
How to collect Direct Debit payments with GoCardless
Create your free GoCardless account, access your user-friendly payments dashboard & connect your accounting software (if you use one).
Easily set up & schedule Direct Debit payments via payment pages on your website checkout or secure payment links.
From now on you'll get paid on time, every time, as GoCardless automatically collects payment on the scheduled date. Simple.
2. 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. 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 into your cash flow 24/7.
3. Beef up your payment terms
How strong are your payment terms? If you’re encountering regular issues with late payments, revising your payment terms may be a good idea. Many customers still use the traditional 30-day payment term, but that’s not the only option. Zero days, seven days, 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. It’s worth pointing out again that using Direct Debit to collect payments eliminates late payments.
4. Review your pricing process
Don't forget about pricing when you’re working out how to improve cash flow. Look for inefficiencies in your operational costs, the size of your product range, or the number of employees to see if you could bring 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.
5. 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 customers owe you. Also, consider using invoice factoring – a type of invoice finance where you sell outstanding invoices to third parties – to stabilise revenue and boost cash flow.
6. 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 improving 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.
7. 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 sell them at a discount, to maximise cash flow and boost your company’s cash reserves.
Whilst there are several strategies you can employ to improve cash flow, the easiest and most impactful to employ are the first two on our list - optimise your payment process and keep an eye on your real-time cash flow numbers.
Bank payments such as Direct Debit are perfect for businesses looking for reliable income and improved cash flow. As a ‘pull payment’, Direct Debit puts you in control of payment amounts and timings. You set the payment amounts and the due dates, and your customer only needs to give authorisation once for you to be able to collect both one-off and recurring payments.
Once a Direct Debit is set up by you and authorised by your customer, payments will automatically be debited from your customer’s account and credited to yours without any further action required from you or your customer.
In this way, Direct Debit automates payment collection and solves the problem of late payments and cash flow issues for small businesses.
Case Study: Acumen
Acumen, an accounting and advisory firm, implemented GoCardless through QuickBooks to transform their payment collection process. Before GoCardless, Acumen relied on cheques and bank transfers, which required significant time and effort in credit control and chasing late payments. This situation was tying up cash in their customers' accounts and limiting the business's growth potential.
Transitioning to GoCardless has enabled Acumen to streamline its payment process and improve cash flow. With clients now paying by regular monthly Direct Debits, Acumen has significantly reduced debtor days and grown its cash balance.
Acumen director Ross Murray pointed out,
The switch to GoCardless has enabled Acumen to refocus on growth rather than spending energy on getting paid, Ross continued,
We can help
If you’re looking for ways to improve cash flow, GoCardless, as a global leader in bank payments, could be an excellent option.
GoCardless makes it quick and easy to get started, and with no contracts or long-term commitment required, there’s no risk. You can set up instant, one-off, or recurring payments in the merchant dashboard in just a few clicks, and GoCardless automatically creates and sends all the necessary forms, doing all the heavy lifting for you. You can also connect to GoCardless via over 350 partner apps, such as Xero and Quickbooks.
What makes a strong cash flow?
A strong cash flow is characterised by consistent positive cash inflow exceeding outflow. It relies on high revenue, efficient receivables collection, cost control, inventory management, and customer retention. Recurring payments like UK's Direct Debit also help with regular, predictable income. Additionally, a resilient strategy prepares for disruptions by implementing provisions such as emergency funds. Wise investment of surplus cash can also further bolster financial health.
What are 5 ways to keep cash flowing?
Streamline Billing Process: Speed up your billing cycle with automated invoicing software. Send out invoices promptly and consider offering incentives for early payments or imposing penalties for late payments to ensure timely cash inflow.
Expand Revenue Streams: Diversify your product or service portfolio and explore new markets to boost sales and revenue. Regularly review pricing to ensure you're competitive yet profitable.
Manage Expenses: Regularly review your expenses and identify areas for cost reduction. This can involve negotiating better terms with suppliers, optimising operational costs, and reducing unnecessary expenditures.
Implement Effective Collection Strategies: For overdue payments, have a systematic follow-up process. Offer various payment options, including popular UK payment methods like Direct Debit, to make it convenient for customers to pay their dues.
Maintain Cash Reserves: A reserve or emergency fund can serve as a financial cushion during lean periods or unexpected expenses, ensuring you have cash on hand when you need it. Regularly contributing to this fund can ensure continued business operations despite unforeseen circumstances.
What causes low cash flow?
Low cash flow can be attributed to a variety of factors:
Low Sales Volume: If your business is not generating enough sales, it will directly affect your cash inflow.
High Expenses: Excessive overheads, high production costs, or unnecessary expenditures can drain cash resources.
Poor Accounts Receivable Collection: If customers are slow to pay their invoices or default altogether, it can severely impact your cash flow.
Overinvestment in Inventory: Tying up too much cash in unsold goods can lead to cash flow issues. Inventory should be managed efficiently to ensure it turns over at an appropriate rate.
Inadequate Pricing: If your products or services are not priced properly, this could mean you're not generating enough revenue to cover costs and contribute positively to cash flow.
Seasonal Fluctuations: Some businesses experience periods of high and low sales due to seasonal influences. These variations can lead to periods of low cash flow if not planned for accordingly.
Unexpected Expenses: Unplanned costs such as emergency repairs, lawsuits, or other unforeseen expenditures can rapidly deplete available cash.
Lack of Financial Planning: Without a well-structured budget and cash flow forecast, it's easy to lose sight of the financial health of your business and run into cash flow issues.