10 tactics to improve cash flow for your business

Andy Tweddle, Payments writer
14 Jan 2022
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Positive cash flow ensures you have enough funds to cover the bills and the resources for growth. On the other hand, if your debts are due before your receivables are paid, you’ll experience cash flow difficulties.

According to the Federation of Small Businesses, small businesses in the UK are owed £6,142 on average, while 30% of SMEs are forced to use an overdraft to deal with the financial impact of cash flow issues. We’ll cover how to improve your positive cash flow with ten simple tactics.

Why is cash flow so important?

In short, cash flow is the rate at which capital flows into and out of your company over a specific period of time.

Cash flow is a vital component of success for any business. If you’re consistently waiting for late invoices to be paid, you may end up in negative cash flow, with more cash leaving your business than coming in. This results in your business not being able to pay its own bills, leading to late fees and potentially a negative effect on your creditworthiness. Plus, you may not have the cash needed to purchase new inventory, fund new projects, or hire new employees.

Cash flow enables businesses to cover all the essential expenses from rent to payroll and supplies. Prolonged negative cash flow means your business is spending more than it makes over time and eating into any saved reserves. This can eventually lead to bankruptcy, in a worst-case scenario.

How to improve cash flow

When it comes to managing cash flow, both inflows and outflows matter. So, it’s important to improve payment collections while simultaneously looking at ways to cut operational costs. Here’s our rundown of ten practical ways to improve cash flow.

Optimise inflow

1. Use automated invoicing

Delayed invoices can lead to delayed payments. Manual processing leaves you open to time-wasting errors, from missing details to misplaced invoices. Streamline the process with automated software (like Xero or QuickBooks) that sends out invoices as soon as a product or service has been delivered. Automated software not only speeds up invoice submission but also cuts down on human error. An optimised invoice delivery system ensures faster payments, which is one of the best ways to improve cash flow.

2. Offer seamless payment options

Make the payment process as simple as possible for your customers. Consider embedding payment links directly into invoices and emails for swift and easy redirects to an online checkout page. Offer a combination of payment options to suit client preferences, including the likes of credit and debit cards, Direct Debit payments, and account-to-account transfers. Instant bank transfers (powered by open banking) like those enabled by TrueLayer’s Payments API allow customers to pay instantly, with bank authentication baked into the payment experience.

3. Credit check your customers

When extending credit to new customers, run a credit check first. It may be tempting to push forward with the sale, but poor credit often means a history of late payments. Ask for upfront payment in these cases or set up your sale with a high interest rate and clearly defined late fees. Similarly, TrueLayer’s Verification API can verify your customer’s account details in seconds for added peace of mind.

4. Automate the payment collections process

Create a structured collection process or dunning strategy to reduce the risk of overdue payments. Dunning, simply put, is the process by which you request money that is owed to your business by customers. This should involve a predetermined framework built into your accounting processes. Send customers automatic email reminders a few days before and after invoices are due. You could follow up with another reminder at 15 days and again at 30 days, before commencing legal action as a last resort. Prioritise pursuit of your biggest debtors to improve cash flow quickly. Charging late fees can also encourage timely payments (as can incentivising prompt payment with discounts) – just be upfront with this policy when invoicing.

5. Review your inventory

Is a significant percentage of your cash tied up in unsold inventory? Review your business’s inventory to see which products are selling at a slower pace. Look at seasonal patterns to see if the slow sales figures are a blip or a long-term trend. Sitting on unsold stock can impact your cash flow, as too much of your cash could end up tied up in inventory, as well as the associated costs of holding stock and maintaining it to a good, saleable condition, so consider selling it at a discount to give cash reserves a boost.

6. Increase your prices

If you’re having difficulty managing cash flow, it might be time to reassess your pricing strategy. How do your prices compare to competitors? Do prices accurately reflect parts and labour? It’s obviously important to strike the balance between competitive pricing and fair compensation. There are a number of pricing strategies your business can adopt.

Optimise outflow

7. Reduce your overhead costs

Are there any necessary expenses that could be eliminated or reduced to reduce your overhead costs? Contact your suppliers to determine whether you’re receiving the most competitive rates for things like broadband and electricity, discussing bulk purchasing options and other opportunities for discounts. Automating your processes saves both time and money. For example, automating financial reporting processes could save up to 25,000 hours of rework due to human error.

8. Reduce fraud risks

Fraud can have a significant effect on cash flow. Card-not-present fraud, for example, can leave merchants having to cover the cost of that fraud, as cardholders aren’t generally held liable for fraudulent activity on their accounts.

Plus, there’s also chargeback fraud to consider. Chargeback fraud can take a serious toll on company cash flow, as banks typically side with the consumer on chargeback requests. If found liable for a chargeback, your business must not only cover the cost of the product or services paid for by the customer but also pay chargeback fees averaging between £10 and £20 per transaction. Consider accepting payments using open banking technology, which includes in-built bank authentication to reduce fraud drastically.

9. Rent, don’t buy

It’s not always necessary to purchase equipment, vehicles, or supplies outright. Leasing spreads the cost of equipment and supplies over time. This means you’ll only pay cash in smaller increments, reducing outgoings in the meantime. While you won’t own the asset, you’ll benefit from lower monthly payments to keep cash flow under control.

Optimise cash flow management

10. Organise your accounting books

Manage your cash more effectively with a cloud-based accounting platform (again, the likes of Xero or QuickBooks can help with this) offering real-time data insights. Keep the books balanced with up-to-date payable and receivable accounts, so you can see exactly where your money is coming in and flowing out. A good accounting system also makes it easier to generate cash flow forecasts, which help you prepare for the potential of lean periods in the months to come.

Open banking offers a better payment experience for you and your customers

If you’re having difficulties improving cash flow, try a blend of the strategies outlined above that makes the most of your business’ situation. By reducing costs and encouraging more timely payments, you’ll be better able to maintain positive cash flow.

As mentioned, a big part of improving cash flow comes from an improved payment collection process. Powered by open banking, TrueLayer’s Payments API offers a more efficient alternative to card payments and manual bank transfers. Fees are lower than with card payments, payments settle instantly, and there’s no need for customers to fill out lengthy forms or card details.

Instant access to open banking
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