Cash flow management is a challenge for so many businesses – that’s why we’ve asked the experts and gathered 21 cash flow tips to give you a helping hand.

1. Ensure you have good financial reporting

The first step to good cash flow management is to understand the ebb and flow of money through your business. For that, you need accurate, up-to-date information. Whatever your size of business, you should be routinely receiving a regular stream of data from your finance department. Management reports (for reviewing your current balance sheet), debtor books, budgets and cash flow forecasts should be at your fingertips.

2. Switch to online accounting software

As well as good financial reporting, handling your accounts online can help you get a better grip of your finances.

‘When properly maintained, online accounting software can provide you with real time access to your key account balances and customer debts, while allowing you to keep an eye on overheads,’ says Andrew Moss, partner at DSG Chartered Accountants.

3. Know your taxes

Keep your tax affairs in order. First off, use cash accounting for VAT. ‘By using cash accounting, which is available for businesses up to £1.6m turnover, you only pay the VAT on monies you have collected in the quarter rather than what you have invoiced. This way, you are not using your money to pay VAT on invoices that won’t be settled until sometime after the VAT quarter or even payment date,’ says Moss.

He also says that you should understand your business’s tax cycle and make provision, as taxes can fall monthly, quarterly and annually. So, putting cash aside into deposit accounts to save towards VAT and corporation tax, for example, can take the stress away when the time comes to make the payment.

‘The trick is not dipping into the pots before payments fall due – projections will help with this too by identifying where gaps may arise,’ he adds.

Finally, make use of those tax allowances. “Whilst saving tax should not be the key driver, the timing of business decisions can impact when you get the associated tax benefit,’ says Moss.

‘Make additional pension payments and asset purchases at the end of your financial year when you have a good idea of the outturn rather than just after which would delay the impact on the corporation tax liability by almost 12 months.  Speak to your accountant about this and other tax reliefs such as R&D tax credits which might be available to your business.’

4. Establish debt chasing procedures

Credit control and debt recovery are vital pillars of good cash flow management.

Debt can seriously compromise your business and late payments have become even worse during the pandemic. Last year, the Credit Protection Association reported that over half (54 per cent) of businesses said they were waiting on late payments on invoices due to Covid-19. Some 47 per cent have seen revenues decline, with nine per cent of businesses report that income was at least 50 per cent below where it was last year.

‘For any shape and size of organisation, the most important aspect of managing cash flow in terms of credit control is to have a clearly mapped out debt chasing procedure in place and to stick rigidly to this process,’ says Karl Williams, head of debt recovery at Pannone Corporate.

However, the longer a debt remains unpaid, the harder it becomes to collect.

‘Good practice might look like having 30-day payment terms and having a reminder in place for day 26 or 27 to communicate with a customer to check everything is lined up for payment on time,’ says Williams. ‘This is all part of your customers’ experience so if positioned well, it will demonstrate that you are an organised and helpful business.’

Ultimately, debt chasing is about maintaining a delicate balance in client relationships – keeping them happy while getting your money. Established in 1918, Lantex Manufacturing has had decades to get it right. ‘We maintain in-house credit control and it works well because we’re a small company with a good rapport with our clientele,’ says Margaret Sangster, former FD at the Lancashire-based textile manufacturing firm.

5. Have a dedicated credit controller

Julian Roberts, director of working capital advisory at HSBC, believes it’s vital to have a good credit controller. ‘You need to have people who are consistently involved in chasing debt, rather than just fitting it in on a Saturday morning as a number of business owners do.’

Many owners get involved in chasing debt from customers with whom they have a relationship, but that’s not always appropriate. Sometimes it’s better to have a clear division of responsibility and not wear two hats.

Williams agrees. He adds that this process should form part of your onboarding with customers or clients to set expectations from the outset, suggesting that somebody within your own organisation or outsourced should be assigned as having accountability for managing the procedure. This allows them to establish a contact within your customers’ businesses and to build an ongoing working relationship.

‘Having these open lines of communication can make a huge difference in how your account will be prioritised when a purchase ledger clerk at a client organisation is dealing with payments,’ he says. ‘It helps to fully understand your customers’ payments processes from day one so you can work together effectively and manage prompt payments in line with any systems they have in place.’

6. Use a third party to collect your debts

If all else fails and your cash flow is suffering as a result of large quantities of cash tied up as unpaid debt on your books, consider outsourcing the work to a collection agency. Although they have a mixed reputation, figures from the Credit Services Association (CSA) trade body indicate that its members recover up to £5bn each year.

A collection agency is advisable if you have a large number of customers who represent a small value of debt or are dealing across borders, as they will be aware of cultural differences and can often work outside normal office hours.

7. Understand your customers and the nature of their payment cycles

Many of your clients will have set dates in the month when they pay invoices, so it’s a good idea to incorporate that into your credit control system. ‘If you miss a customer’s cheque run you might have to wait another month and that directly affects your cash flow,’ says Neville Upton, former CEO of The Listening Company, now part of Serco. ‘Some customers we invoice weekly, some monthly, and that flexibility means we’re much more likely to receive payments on time.

8. Only deal with customers who have a good credit history

It’s a good idea to credit check customers in advance and continue to monitor their payment practices throughout your business relationship. One way is to purchase status reports from credit agencies – or you can check them online, but in some cases, you’ll need to pay a fee. These include full customer details and financial results along with the payment experience of other suppliers, county court judgments and a recommended credit rating.

9. Make your terms and conditions clear

If an agreement to terms and conditions forms part of the grounds on which any deal is struck, it avoids misunderstandings and strengthens your ability to collect any outstanding amount later on.

10. Invoice accurately

Many of your clients will have set dates in the month when they pay invoices, so it’s a good idea to incorporate that into your credit control system. ‘If you miss a customer’s cheque run you might have to wait another month and that directly affects your cash flow,’ says Upton. ‘Some customers we invoice weekly, some monthly, and that flexibility means we’re much more likely to receive payments on time.’

A golden rule is to never send out invoices with the intention of making corrections afterwards. ‘If your invoices aren’t accurate, you might only discover this when you chase for payment, which could delay it for weeks, even months,’ says Upton.

11. Charge interest on overdue payments

In the UK, the Late Payment of Commercial Debts Act of 2002 was introduced to enable small businesses to charge interest at eight per cent above the existing base rate on debts due from large businesses, public sector bodies and other small businesses and to claim a contribution towards the cost of a collection agent’s fees.

The Pay on Time website offer guidance on procedures for charging interest on overdue payments.

12. Link sales commission to when invoices get paid

It can make an overnight difference to your cash flow if you link sales remuneration to the actual payment of invoice, rather than having bonuses paid based on billed revenue. Upton says, ‘You’ll find if there’s a problem with payment from a customer, the sales rep is the first on the phone to find out why, which also helps maintain the customer relationship and gives a sense of coherence.’

13. Cut costs and spread payments

Put simply, you can improve your cash flow by not purchasing items unless they are business critical and you can spread the payment rather than taking a lump sum out of your cash flow. Hire purchase and leasing can be used to fund a range of items these days, including new and used cars, light commercial and heavy goods vehicles, plant and machinery, office furniture and computer equipment.

14. Combat seasonality by diversifying

All businesses have fluctuating levels of income and expenditure, which can play havoc with cash flow if not properly managed, especially if the peaks and troughs are unpredictable. For businesses where demand for goods and services is affected by seasonality, this often means they face their greatest costs during their quietest period. And it’s not just Christmas cracker makers or Easter egg producers that are affected by annual highs and lows.

James Lambert, chief executive of ice cream manufacturer Richmond Foods, knows that sales will always peak in the summer months, but he’s managed to diversify and pile up profits in the winter months too. The secret, he says, is being innovative while playing to your strengths. ‘Our Skinny Cow range is a good example of this, as low-fat ice cream sells particularly well in January. While you can sell anything when it’s 85 degrees outside, in winter you have to be clever.’

15. Improve how you use bank accounts and overdrafts/loans

Bank overdrafts are a popular resource for plugging short-term gaps in cash flow, providing additional cash when needed and enabling unforeseen costs to be dealt with rapidly. Ensure that the size of your overdraft limit suits your needs – too small won’t solve cash flow problems, too large may mean paying unnecessary fees.

Bank loans offer a flexible and usually cheaper alternative with a planned repayment schedule and lower interest rates. Some high street lenders will even advance a lump sum against future cash flow, instead of only against assets. Ideally, negotiate loan or overdraft facilities with your bank when you’re in a strong cash position, before you need them, as you’ll get a better deal.

Many banks now tailor loan repayments to match the cyclical nature of your business, even offering ‘payment holidays’. ‘If there’s no income during a period then there’s no point you making repayments,’ says Paul Chadney, managing director of Capisce Finance.

Another useful process offered by some banks is what’s called ‘sweeping’. When current account funds are low you often don’t have time to wait for a transfer to top it up from your savings account, which may require a notice period. A solution is to set up an inward sweep from one to the other that is triggered when the current account balance falls below a specified value.

16. Use asset-based financing

Asset-based finance is where a bank or other lender advances you money against the assets held by your business. This could be property, land or even computer equipment.

‘You can generate cash against most of the items on your balance sheet,’ says Dynshaw Italia, former FD and chief operating officer at Cobra Beer, the international beer brand. ‘For a business that’s growing fast, the fees or interest you pay are worth it in return for the ability to free up cash. I’m surprised more people don’t use asset-based finance.’

Invoice discounting, debt factoring and stock financing are types of asset-based finance commonly used by businesses that don’t have capital assets to leverage.

Factoring involves selling your invoices to a third party and in return they recover the debts and allow you to draw loans in advance against the money owed to you. Typically, you’ll be advanced around 85 per cent of the value of invoices within 24 hours of them being raised. You pay a charge for the period the invoices remain outstanding, in addition to a fixed fee for the service. ‘This can sometimes be cheaper than, say, using an overdraft and employing an in-house credit controller to chase invoice debt,’ says George Eleftheriou, former northern region director at Barclays Business Banking.

With invoice discounting, your business retains control over the administration of your sales ledger, so unlike factoring you collect the money from your customers and they need never know you’re using outside financing arrangements. ‘We were one of the first companies to start using factoring in the early 90s,’ says Italia, ‘but soon realised it would be better if we could collect the money ourselves, as some of the restaurants we supply are small and have varying opening hours.’

One disadvantage of invoice financing is that some seasonal businesses experience a drop in orders at certain times of the year, so the debtor book is smaller and borrowing against it is not ideal. That’s where stock financing can help, enabling firms to borrow against their reserves – say, 50 per cent of the stock’s anticipated for-sale value. The danger, however, is that there’s no guarantee you will be able to offload those goods at a decent price to cover the funds advanced to you.

17. Keep your bank informed and project cash flow needs

Keeping secrets from the bank – and possibly yourself – will only do damage if you find yourself in need of more assistance.

‘Banks don’t like surprises. A peak sales quarter might be great news but if this means you need additional facilities at short notice, this might ‘spook’ the bank and suggests that you might not be on top of your business,’ says Moss.

‘Using sensible projections, you can identify potential borrowing requirements in advance and also look for the most appropriate solutions such as invoice finance, asset finance or loans.’

18. Use letters of credit for bank finance

A letter of credit allows a supplier to be paid straight away and the bank agrees to debit the business account at a fixed or determinable future date. Provided businesses don’t exceed their agreed limit on letters of credit and can provide guarantees, it can be a great help when managing cash flow.

19. Negotiate terms with your suppliers

Try to secure the best possible payment terms with your suppliers. If you’re a fast-growing business, explain your circumstances and see if you can arrange credit of 45 days or even 60 days. If you don’t ask the question, you’ll never know what’s possible and will be stuck with 30 days by default. ‘You’ll be surprised how flexible your creditors can be if you communicate openly with them,’ says Cobra Beer’s Italia.

Moss agrees. ‘Take advantage of the maximum term of credit available to you but pay on time and regularly which will build confidence in you from your supplier,’ he says. ‘See if consignment stock is available which means that you only get invoiced as you use it so you won’t have cash tied up in inventory that might not move for a few months.’

20. Avoid overusing petty cash or corporate credit cards

The trouble with corporate credit cards is that unless people are incentivised to correctly allocate the costs to the client concerned, or inwardly to the business, you’ll struggle to have a true record of expenditure. If there’s a delay before allocations are made to clients, who are to be invoiced for those expenses, your business bears the cost in the meantime.

It isn’t sensible not to rely on petty cash either. This is best reserved for smaller team lunches and reimbursing employees for buying items for the business.

21. Barter or contra your goods and services

For many businesses, product inventory increases while cash flow decreases, but bartering gives you the opportunity to turn your spare capacity or inventory into value by giving your business purchasing power when you need it. There are several national and international bartering networks for businesses, including ITEX, Barterbank, Bartercard and BarterItOnline, most of which offer you an account where you accumulate and spend trading points.

Further reading

A guide to business cash flow management issues