A business can have healthy margins and plenty of orders and still worry about payroll every month. Profit on paper isn’t cash in the bank, especially when customers pay 30 or 60 days after the invoice and your own costs are due right away. In a small business the gap hurts more, because there is rarely a large cash cushion or a person whose job is to watch every invoice.
Below are ways to improve cash flow without new borrowing or cost cuts. Most of them are about receivables, because that is where small businesses usually have money tied up.
1. Know how much cash you will have in a few weeks
Start with a simple cash flow forecast for the next 8 to 13 weeks. Put in expected payments from customers by due date and your fixed expenses, such as payroll, taxes, rent and loan repayments. The forecast will show you in advance the weeks when cash runs short and give you time to act. Update it every week, because a forecast from last month tells you very little.
2. Invoice promptly and get the details right
Every day you wait to send an invoice delays payment by another day. Invoice on the day you deliver the work or the goods rather than in one batch at the end of the month. Check the details your customer needs too, such as a purchase order number or the name of the person who placed the order. In larger companies an invoice without a PO number can sit in the approval process for weeks.
3. Set clear payment terms
Put your payment terms in the contract. If there is ever a dispute, it is easier to show what the customer agreed to. You can give new customers shorter terms and ask for a deposit or milestone payments on large orders. Many countries cap payment terms between businesses. In the EU, the Late Payment Directive sets 60 days as the limit unless both sides expressly agree otherwise and the longer term isn’t grossly unfair to the supplier.
4. Send the first reminder before the due date
Some late payments happen because the invoice got lost in an inbox or is waiting for someone’s approval. A message a few days before the due date gives the customer time to find the invoice and schedule the transfer before it becomes overdue. After that, reminders should follow a fixed schedule, for example 3, 7 and 14 days after the due date, even in a week when nobody has time for them. You will find ready-made wording in our payment reminder email templates.
5. Make it easy to pay
Your bank details, the amount and the payment reference should be in every message, and if you accept online payments, include a link. A customer who has to dig through last month’s attachments to find the invoice is more likely to put off paying.
6. Match payments every day
If you match bank payments to invoices once a week, for several days you don’t know who is actually late. A reminder may then go to a customer who has already paid, which hurts the relationship more than the delay itself. Matching payments daily gives you an accurate overdue list.
7. Use late payment interest and compensation
In the EU and the UK you are entitled to statutory interest on late business payments and to fixed compensation for recovery costs, at least €40 in the EU and £40 to £100 in the UK depending on the size of the debt. You can decide which customers you charge, but once you set a rule, apply it every time so customers see that your terms mean something. The US has no statutory fixed fee, so state your interest rate or late fee in the contract and on the invoice, within your state’s limits. You can work out the amount with our late payment interest calculator.
8. Write down what happens when reminders don’t work
When reminders don’t work, you need a next step, such as a phone call, a demand letter and finally a collection agency or court. These steps should be written down and applied consistently, including in the months when your team is busiest.
Where automation helps
Steps 4, 6, 7 and 8 are repetitive tasks that lend themselves to automation. In Sunbay, payments booked in your accounting system are matched to invoices automatically, reminders go out before and after the due date, and at later stages the system issues interest notes and demand letters. When a case needs a conversation or a decision, Sunbay creates a task for your team. At the Flowmore agency, where the CEO used to chase payments himself, late payments are down 85%. Read the full Flowmore story.
FAQ
How can a small business improve cash flow quickly?
Changes on the receivables side work fastest. Invoice promptly, remind customers before the due date, match payments daily and respond to delays consistently. A cash forecast for the next few weeks will show you when cash is likely to run short.
What is the difference between profit and cash flow?
Profit is the difference between revenue and costs over a period. Cash flow is about whether the business has the money to pay its bills on time. A business can be profitable and still have cash flow problems if customers pay late.
Is receivables automation worth it for a small business?
It depends on how much time chasing payments takes today and how often customers pay late. Flowmore issues 20 to 30 invoices a month, and since it automated reminders, it has had 85% fewer late payments. If you send a handful of invoices a month and customers pay on time, a good reminder schedule is usually enough.
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