It is one of the most frustrating situations in business: you are busy, customers are happy and the work is profitable on paper, yet the bank balance keeps dropping. That is a cash-flow problem, and it catches out plenty of good businesses.
Cash flow is simply the timing of money coming in and going out. Get the timing wrong and you can be short of cash even in a good month. The fix is rarely complicated. It is about building a few steady habits.
1. Invoice straight away
Many owners leave invoicing until the end of the month, or until they have a quiet afternoon. Every day you wait is another day before you are paid.
Send invoices as soon as the work is done or the goods are delivered. Accounting software can create and send an invoice from your phone in a couple of minutes. Make sure every invoice clearly shows what it is for, the amount, the due date and how to pay.
2. Make it easy and clear to pay you
People pay faster when it is simple. Include your bank details on every invoice and consider adding a payment link so customers can pay by card in a click.
Set clear payment terms before you start work, not after. Fourteen or thirty days is common, but there is nothing wrong with asking for a deposit up front for larger jobs, or full payment in advance for smaller ones.
3. Chase politely, and early
Most late payments are not deliberate. Invoices get lost, forgotten or stuck waiting for approval. A friendly reminder a few days before the due date, another on the day and a firmer note a week later will clear most of them.
Many accounting tools can send these reminders automatically, which takes the awkwardness out of it. If a customer regularly pays late, it is fair to change their terms or ask for payment up front in future.
In the UK, businesses can also claim statutory interest and compensation on late payments from other businesses. You do not have to use it, but it is worth knowing it exists.
4. Look ahead, not just back
Your bank balance tells you where you are today. A simple cash-flow forecast tells you where you will be in a few weeks.
You do not need anything fancy. A spreadsheet with the next eight to twelve weeks across the top, expected money in and expected money out down the side, and a running balance at the bottom is enough. Include the big, irregular payments that are easy to forget, such as VAT, tax bills, insurance renewals and annual subscriptions.
Update it once a week. If you can see a tight month coming, you have time to do something about it.
5. Keep a buffer, and keep tax money separate
Aim to build up a cash reserve that would cover at least a month or two of essential costs. It turns a slow month from a crisis into an inconvenience.
It also helps to move money for tax into a separate savings account each time you are paid. Whether it is VAT, income tax or corporation tax, setting aside a percentage of every payment means the bill is already covered when it arrives. Your accountant can suggest a sensible percentage for your situation.
A few quick wins
- Review your subscriptions and direct debits every six months and cancel what you no longer use.
- Ask suppliers whether longer payment terms are available.
- Offer a small discount for payment on the day if it suits your margins.
- Avoid tying up too much cash in stock that is slow to sell.
The weekly ten minutes
Put ten minutes in your diary every week to check your bank balance, look at which invoices are overdue, send reminders and update your forecast. It is not the most exciting part of running a business, but it is one of the most important. Businesses rarely fail because they are not profitable enough. Far more fail because they run out of cash.
