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cash flow, small business

Cash flow management tips for your business

Ollie Maitland Jul 03, 2024

What is cash flow management? 

Cash flow represents the movement of money into and out of your business. When money flows into your business, it can come from various sources such as sales revenue, loans, or investments. Cash flows out of the business when you pay for expenses like rent, salaries, stock, or bills. 

Cash flow management is usually a short term plan (often 13 weeks) to track, analyse, and optimise these inflows and outflows to maintain a healthy balance.

Why is cash flow management important?

Effective cash flow management is crucial for the good financial management of any business but can be crucial for small businesses with limited cash or treasury facilities. By ensuring you have enough cash to cover daily expenses, you can make timely business decisions and keep a good, reputable financial standing with your suppliers and partners. This practice helps you avoid taking on unplanned debt and reduces reliance on potentially uncertain short term credit facilities. Proper cash flow management also positions you to seize opportunities for new investments or business expansion.

How accounts payable and accounts receivable can impact your cash flow

Accounts payable is money your business owes to suppliers. How you manage your accounts payable can have a significant impact on your cash flow. For example if you have a £20,000 invoice from a supplier due in 7 days, but you haven't received payment from your customers yet, this might create a cash crunch.

Delaying payments can help retain cash longer, but it can also strain supplier relationships if not handled carefully. Maintaining a good business credit score and a high credit limit can be helpful to give confidence to creditors that your business is less risky and open up the conversation to longer payment terms. As a result a good credit score shows suppliers that you are trustworthy and unlikely to default, making them more likely to extend credit terms. This way, you can pay your suppliers after receiving payments from your customers, easing the strain on your cash flow. 

Top tip: See if you can boost your business credit profile with our Credit Review Service.


Accounts Receivable is money owed to you by your customers. Delays in receiving payments can lead to cash shortages. For example, if you sell goods worth £35,000 on credit but the payment isn't due for 30 days, you won't see that cash immediately, impacting your ability to cover any upcoming expenses.

Ensuring that your debtors can pay requires good accounts receivable management by implementing processes such as a strong credit control process. Make sure to credit check your customers before extending credit and set realistic credit terms based on their credit limits. This reduces the risk of late paying customers and helps to maintain a healthy cash flow.

Top tip: Use Credit Risk Manager to see your credit risks next to your invoices, to improve your credit control process.

What other factors can impact business cash flow?

There are other factors that can also impact your cash flow. For example, overstocking your inventory can tie up money in unsold products, high overheads such as rent can cause a strain and poor budgeting (for example calculations on margins) and forecasting could cause unexpected issues. 

Some industries are particularly prone to financial challenges due to their nature. For instance, the construction industry often faces large projects with long payment cycles. Retail businesses frequently deal with seasonal fluctuations and high inventory levels, both of which can impact available funds. Similarly, the hospitality industry experiences seasonal variations and fixed overheads that can cause financial issues. In the manufacturing sector, high upfront costs for materials and equipment can lead to financial gaps. 

Understanding these factors is important to mitigate any potential issues and maintain your business’ financial health. 

6 tips for effective cash flow management

Here are some tips to help you manage your business cash flow better:

1. Review cash flow in board or management meetings

By keeping a close eye on your cash flow, you can anticipate and address potential shortfalls before they become serious issues. Here's how you can effectively monitor your cash flow:

  • Keep accurate and up-to-date cash flow statements to track the movement of cash in and out of your business. These statements provide a clear picture of your financial health.
  • Set a schedule to review your cash flow regularly, such as weekly or monthly. This helps you stay informed about your financial status and make timely adjustments as needed.
  • Use a cash flow forecast template to predict future cash flow based on expected income and expenses. This allows you to plan ahead and make informed financial decisions.


2. Collect cash (e.g. invoices) promptly and follow up

Prompt invoicing ensures faster payments. The sooner your customers receive their invoices, the sooner they can process and pay them. It’s also important to follow up and remind customers about overdue invoices to ensure they don’t become late. You can use cloud accounting software to automate invoice generation and reminders to significantly reduce the manual effort for your business.

You could also consider encouraging on time payments by offering small discounts for early settlements. This incentive can motivate customers to pay their invoices faster.


3. Improve credit control for business customers

Implementing a strong credit control process can help to reduce late payments for better cash flow. Here’s some tips to improve your credit control:

  • Establish clear credit policies for your customers, including payment terms and conditions. This helps manage expectations and ensures timely payments.
  • Before extending credit, evaluate the creditworthiness of your customers. If they have a poor credit score, you might consider asking for upfront payment to minimise the risk of late payments or defaults.
  • Run credit checks on new customers and extend amounts based on their suggested credit limit. 


4. Manage your inventory efficiently

Holding too much inventory ties up your cash. Try to maintain an optimal level of stock that meets demand without overcommitting your resources.
You could use inventory management software to track inventory levels, sales trends, and reorder points to keep your stock levels balanced. Make sure to regularly review your inventory to adjust orders based on current sales data.


5. Negotiate payment terms

Extending the time you have to pay your suppliers keeps cash in your business longer. This can be crucial for managing your cash flow during tight periods. If you already have a strong relationship with your suppliers, you could have an open discussion about extending payment terms. For new supplier relationships, a good business credit score puts you in a strong position to negotiate favourable terms, such as extended payment days and a higher credit limit.


6. Create a cash reserve

Building a cash reserve acts as a financial buffer against unexpected expenses or slow periods. This reserve can help you navigate through a difficult time, without disrupting your operations.

To do this, you could set a target amount for your cash reserve based on your average monthly expenses. You could then automate transfers to your reserve account whenever you receive payments from customers.

What to do if you have a cash flow shortfall

Even with the best planning, you might encounter a cash flow shortfall. When this happens, having access to external finance, such as a business loan, can give you the boost you need to keep your business running smoothly. Funding can help cover immediate expenses, pay suppliers, or meet payroll during tough times. At Capitalise, we work with 100+ UK business lenders to help you find the right funding solution for your needs. Start a funding search today to compare your options and find the best fit for your business.

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