%3Aquality(80)%3Afill(transparent)&w=1080&q=75)
%3Aquality(80)%3Afill(transparent)&w=3840&q=75)
Cash flow management is the process of tracking, forecasting and controlling the money moving in and out of your business, so you always have enough cash to pay your bills when they fall due. The most effective cash flow management tips are to review your cash position regularly, forecast ahead, invoice promptly, check customers before offering credit, negotiate supplier terms, keep stock lean, plan for tax bills and build a cash reserve. This guide covers what cash flow management involves, why it matters, and how accounts payable and accounts receivable affect the cash in your bank. We've also included nine practical tips, the warning signs of a cash flow problem, and what to do if your business does run short.
What is cash flow management?
Cash flow is the movement of money into and out of your business. Money comes in from sources such as sales revenue, loans or investment, and goes out when you pay for expenses like rent, salaries, stock and bills. Cash flow management is how you track, analyse and optimise those inflows and outflows. It's usually a short term plan, often covering the next 13 weeks, which gives you enough visibility to spot a gap before it arrives while staying close enough to the present to be accurate.
Why is cash flow management important?
Good cash flow management is central to the financial health of any business, but it matters most for small businesses with limited cash or treasury facilities. When you know you have enough cash to cover daily expenses, you can make timely decisions and keep a reputable financial standing with your suppliers and partners. It also helps you avoid taking on unplanned debt and reduces your reliance on short term credit that may not always be available when you need it. And because you can see what cash you'll have in the weeks ahead, you're in a stronger position to take advantage of opportunities, such as a new investment, a bulk stock discount or expanding the business.
How do accounts payable and accounts receivable affect cash flow?
Accounts payable and accounts receivable are the two biggest everyday drivers of your cash position, because they decide when money actually leaves and arrives in your account.
Accounts payable
Accounts payable is the money your business owes to suppliers. How you manage it has a direct impact on your cash flow. For example, if you have a £20,000 supplier invoice due in 7 days but haven't yet been paid by your own customers, you could face a cash crunch.
Delaying payments can help you hold onto cash for longer, but it can strain supplier relationships if it isn't handled carefully. A better approach is to agree longer payment terms upfront. A good business credit score and a high credit limit give suppliers confidence that your business is lower risk and unlikely to default, which makes them more open to extending your terms. That way, you can pay suppliers after your customers have paid you, easing the pressure on your cash flow.
Top tip: use your Capitalise account to check your business credit score before you approach a supplier about better terms.
Accounts receivable
Accounts receivable is the money your customers owe you, and delays in receiving it are one of the most common causes of cash shortages. For example, if you sell £35,000 of goods on 30 day credit terms, you won't see that cash for at least a month, which can affect your ability to cover upcoming expenses in the meantime. Late payment is a widespread problem for UK businesses. The government estimates that businesses are owed around £26 billion in late payments at any given time, and that late payments lead to around 14,000 business closures a year. Making sure your customers can pay starts with a strong credit control process. Credit check customers before extending credit, and set realistic terms based on their suggested credit limit. This reduces the risk of late payment and helps keep your cash flow healthy.
Top tip: connect Xero, QuickBooks or Sage to your Capitalise account and our credit risk manager shows the credit risk behind every invoice you send, so you can spot which customers are most likely to pay late.
What other factors can affect business cash flow?
Beyond payables and receivables, a few other things can put pressure on your cash flow:
Some industries are also more prone to cash flow pressure because of the way they trade.
Industry | Common cash flow pressure |
|---|---|
Construction | Large projects with long payment cycles and retentions held back until completion |
Retail | Seasonal sales peaks and troughs, plus high stock levels to fund ahead of busy periods |
Hospitality | Seasonal trading combined with fixed overheads like rent and staff costs |
Manufacturing | High upfront costs for materials and equipment before finished goods are sold and paid for |
Understanding which of these apply to your business helps you plan for them in advance and protect your financial health.
9 cash flow management tips for your business
These are the steps we'd recommend to keep more cash in your business and avoid being caught short.
1. Review cash flow in board or management meetings
Keeping a close eye on your cash flow lets you spot potential shortfalls and deal with them before they become serious. To make cash flow a regular part of how you run the business:
2. Build a rolling 13 week cash flow forecast
A cash flow forecast predicts your future cash position based on the income and expenses you expect. A 13 week forecast is a popular choice because it covers a full quarter, including any VAT return or quarterly bills, while staying detailed enough to update week by week. Each week in your forecast should show four figures: your opening cash balance, the cash you expect to receive, the cash you expect to pay out, and your closing balance, which becomes next week's opening balance.
Week | Opening balance | Cash in | Cash out | Closing balance |
|---|---|---|---|---|
Week 1 | £15,000 | £12,000 | £10,000 | £17,000 |
Week 2 | £17,000 | £8,000 | £14,000 | £11,000 |
Week 3 | £11,000 | £4,000 | £18,000 | Minus £3,000 |
In this example, the forecast shows a shortfall in week 3 while there's still time to act, whether that's chasing an invoice, moving a supplier payment or arranging finance. Update your forecast every week with actual figures so it stays accurate, and use a cash flow forecast template or your accounting software to save time.
3. Invoice promptly and follow up
The sooner your customers receive an invoice, the sooner they can process and pay it, so send invoices as soon as work is complete or goods are delivered. Make sure each invoice clearly shows the amount, due date, payment details and any purchase order number your customer needs, since missing details are a common reason for payment delays. Follow up and remind customers before invoices become overdue, not just after. Cloud accounting software can automate invoice generation and payment reminders, which significantly reduces the manual effort for your business. You could also encourage on time payment by offering a small discount for early settlement, which can motivate customers to pay faster.
4. Improve credit control for business customers
A strong credit control process helps reduce late payments and keeps cash coming in on time. To improve your credit control:
5. Use your right to charge late payment interest
If a business customer pays late, UK law gives you the right to claim statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998. Unless your contract sets a different rate, you can charge interest at 8% plus the Bank of England base rate, as well as a fixed sum to cover the cost of recovering the debt:
You don't have to use this right with every customer, and many businesses keep it in reserve for persistent late payers. But stating it in your terms and conditions makes it clear you take payment deadlines seriously, which can encourage customers to prioritise your invoices.
6. Manage your inventory efficiently
Holding too much stock ties up your cash. Aim to keep a level of stock that meets demand without overcommitting your resources. Inventory management software can track stock levels, sales trends and reorder points to keep your stock balanced. Review your inventory regularly and adjust orders based on current sales data, so slow moving lines don't quietly absorb cash you could be using elsewhere.
7. Negotiate payment terms with suppliers
Extending the time you have to pay your suppliers keeps cash in your business for longer, which can be crucial during tight periods. If you already have a strong relationship with a supplier, you could have an open conversation about extending your payment terms. For new supplier relationships, a good business credit score puts you in a strong position to negotiate favourable terms, such as more days to pay and a higher credit limit. Where you can, try to line up your supplier payment dates with the dates your customers usually pay you.
8. Plan ahead for tax bills
VAT, PAYE and corporation tax can take a large amount of cash out of your business in one go, so they should always be built into your forecast. A simple way to avoid being caught out is to move a percentage of your income into a separate account each month to cover upcoming tax bills. If you do find you can't pay a tax bill in full, you may be able to set up a payment plan with HMRC, known as a Time to Pay arrangement, to pay it in instalments.
9. Create a cash reserve
A cash reserve acts as a financial buffer against unexpected expenses or slow periods, helping you get through a difficult time without disrupting your operations. To build one, set a target amount based on your average monthly expenses, such as enough to cover one to three months of fixed costs. You could then automate transfers to your reserve account whenever you receive payments from customers, so the buffer builds steadily without needing a decision each time.
What are the warning signs of a cash flow problem?
Spotting a cash flow problem early gives you far more options for dealing with it. Common warning signs include:
If you recognise more than one of these, it's worth reviewing your forecast straight away and working through the tips above, starting with getting paid faster and talking to suppliers about your terms.
What should you do if you have a cash flow shortfall?
Even with the best planning, you might still face a cash flow shortfall. When that happens, access to external finance can give you the boost you need to keep your business running smoothly, whether that's covering immediate expenses, paying suppliers or meeting payroll. The right option usually depends on what's causing the gap:
Find cash flow finance to cover a shortfall
If your forecast shows a gap ahead, we can help you find funding to bridge it before it affects your suppliers, staff or customers. With a panel of 130+ lenders, you can compare cash flow finance options matched to your business in one place.
%3Aquality(80)%3Afill(transparent)&w=3840&q=75)
%3Aquality(80)%3Afill(transparent)&w=3840&q=75)
%3Aquality(80)%3Afill(transparent)&w=3840&q=75)