Lack of cash flow is one of the main reasons businesses fail. If you’re struggling with cash flow, here’s how to improve it.

According to the Office of National Statistics, cash flow problems account for up to 90% of business closures in the first five years of trading.

Cash flow problems can be caused by a range of challenges. These include making purchasing decisions without up-to-date financial information, not having an annual business plan, not controlling spending, not using a cash flow monitoring system and not reviewing expenses on a regular basis.

But the biggest problem? Customers paying late. When invoices aren’t paid on time, it can have a serious knock-on impact on your business. Some of the most common excuses include: “The person responsible for authorising payments is on holiday” or “We never received your invoice”.

If you’re reading this, the chances are you’ve struggled with cash flow at some point in your business life – or are facing challenges right now. So what can you do to improve your cash flow quickly, and get your business back on track?

1. Understand cash flow versus profit 

Lots of business owners are surprised to see their business is making a profit because their bank balance tells them a different story. Understanding the difference between profit and cash flow is incredibly important for any business owner.

Profit is the difference between your sales and expenses, whereas cash flow is the deposits and withdrawals in the business. Your cash flow is dependent on when you actually get paid by customers or when you pay suppliers. Profit, however, is based on the date you invoice customers and the date suppliers bill you.

Cash flow is also affected by transactions that aren’t classed as sales or expenses, such as loan repayments, purchasing assets, dividend payments to shareholders etc.

2. Risk-profile your customers 

It’s definitely worth checking the risk profile of any customers you’re providing credit terms to, such as the standard 30 days from invoice date. Risk profiling gives you a good indication of how likely they are to pay you – and pay on time.

3. Review late payers

As well as risk profiling, it’s also important to regularly review your customers. Look into who pays late to see whether it’s a regular occurrence – if it is, you need to take action. We’d always recommend starting with a friendly reminder of your payment terms. You could use the opportunity to make sure they’re happy with the service, and find out if there’s any reason why payments are late.

If their response isn’t satisfactory, then you can decide whether you’d like to retain them as a client. After all, not paying you within your agreed terms shows a lack of respect for your services. If you do retain them, however, you may need to take stronger action.

4. Don’t be afraid to chase payment

If your customers pay on invoice or have credit terms, managing those payments is incredibly important. Many businesses deal with them in a reactive way when the payment is already overdue, and worry that chasing debts might upset their customers.

But if you’ve provided a service and your customer has agreed to your payment terms, it’s perfectly OK to follow up when payment is late. In fact, the sooner you chase up, the better. If you don’t chase late payments, you’ll always be last on the list.

Sit down and highlight all invoices which are between 1 and 10 days overdue, then call each customer to check they’ve received your invoice and get a payment date. Put a note in your diary to check the payment has been received – if it hasn’t, follow up.

5. Upgrade your bookkeeping and forecasting 

Keeping your bookkeeping up to date in real-time will make cash flow monitoring much quicker and easier. Quickbooks and Xero are built to record your financial transactions, but don’t have extensive cash flow forecasting capability.

If your affairs are pretty simple, a spreadsheet should do the trick – but you’ll have to manually update it all the time and watch out for errors. Alternatively, try cash flow tools like Fluidly – it connects with Quickbooks and Xero and updates your cash flow forecast in real-time so you’ll always know where you are.

6. Explore your supplier credit terms 

There may be opportunities to improve your cash flow by reviewing whether you’re making use of credit terms with your suppliers. If you’re regularly paying your suppliers early, then delay payment until the actual due date.

7. Reduce costs where you can

One of the simplest things you can do to improve your cash flow is to reduce your costs. Start by reviewing all your regular expenses, overheads and outgoings and see whether they’re all still absolutely necessary. Is there anything you can consolidate? And could you get a cheaper deal with another supplier?

8. Put your prices up

It’s also worth looking at your current prices. Have they been the same for quite a while and if so, can you increase them? Many business owners worry that customers primarily shop on price. However, we only tend to see this happening when they have nothing else to differentiate on.

If customers can’t see any more value between you and your competitors, the only thing they have left to differentiate on is price. So it’s important to step back and focus on why you’re doing what you do, because that’s ultimately what your customers buy into. The more you build your business around the ‘why’, the easier it will be to charge what you’re worth.

Fresh Clarity specialise in helping small business owners like you to free up your time, improve your finances and get that all-important peace of mind. Book a free discovery call with us today to find out how.