My top 10 tips for improving cash flow from customers

The number one issue that I hear from small business owners that they worry about more than anything else is maintaining a healthy cash flow. This is not surprising since cash flow is the lifeblood of any business, but for small businesses, that do not always have the cash buffers to protect them from the ebbs and flows of trading conditions, generating sufficient cash flow can be particularly challenging.

Ensuring that there is a steady stream of cash flowing in from customers is crucial for meeting operational costs, paying employees, and investing in growth. In this blog post, I will highlight my top 10 tips that small businesses can implement to improve cash flow from customers, helping to build a more stable financial foundation for business success.

1. Streamline Invoicing Processes

One of the most effective ways to improve cash flow is by optimizing your invoicing process. Delayed invoicing often leads to delayed payments, which can create a cash flow crunch. Here are a few steps to streamline this process:

• Invoice Immediately: Send invoices as soon as a product is delivered, or a service is completed. The quicker the invoice goes out, the quicker the payment is likely to come in. Don’t wait until the end of the week to do your invoicing, you have already lost a week of ‘free credit’ for your customer.

• Automate Invoicing: Use accounting software to automate invoicing. This helps with sending invoices out promptly, as your customer details, product and services should already be pre-populated in the software. This should also reduce the chance of errors, reducing the chances of delays. Your accounting software can also send automated reminders to customers, and overdue notices, helping to encourage timely payments.

• Have Clear Payment Terms: Clearly define your payment terms on every invoice. This includes the due date, late fees, and any discounts for early payments. Make sure these terms are communicated clearly to avoid any misunderstandings. Again, these can be pre-populated into your accounting software, ensuring that they appear consistently on every invoice.

  
  

2. Chase Outstanding Debts

Keep on top of your outstanding debtors and chase them as soon as an invoice becomes overdue to improve your cash flow. Most small businesses don’t have the resources to employ someone to do this task, so it falls on the business owner’s shoulders. In my opinion, this is fine for the following reasons:

• The business owner generally has the relationship with the customer, or the fellow director of that business. That makes the conversation easier.

• It can be tough asking for money. Don’t delegate it to your bookkeeper or office administration staff member.

• Accountability rests with the business owner. You know that it has been done properly, including leaving voice messages and sending text messages.

• The business owner will get early warning of any problems with product or service, or an issue with the financial viability of the customer and can action appropriately.

  
  

3. Offer Early Payment Discounts

Incentivising customers to pay early can significantly improve cash flow. Offering a small discount for early payment can encourage customers to settle their bills sooner, reducing the time you have to wait for your money. For instance, you could offer a 2% discount if the invoice is paid within 10 days instead of the standard 30 days.

While this might seem like a small amount, when applied consistently, it can make a big difference in improving cash flow. However, it’s important to balance the discount so that it benefits your cash flow without cutting too deeply into your profit margins.

Alternatively, it may be something that you only offer for your larger invoices.

Remember, the sooner you get paid, the better, and the less chance of your customer defaulting on payment.

4. Implement Late Payment Penalties

Whilst early payment discounts can act as the ‘carrot’ in your efforts to improve cash flow, it is also important to have a ‘stick’ for those customers that will not pay. Discourage late payments by clearly stating in your payment terms the penalty for late payments. A reasonable late payment penalty would be 2% above your bank borrowing rate of say, 8.4%, totalling 10.4% per annum. This would equate to 0.2% for every week that the invoice amount was overdue, cumulatively.

However, while penalties can be effective, they should be used carefully. Applying late payment penalties can strain customer relationships. It's often more effective to use them as a last resort, and it is preferable to engage in open communication with customers to resolve payment issues first.

5. Use Payment Plans

Offering payment plans can make it easier for customers to pay, particularly for high-value invoices. Rather than requiring a large lump sum, break payments down into smaller, more manageable instalments. This can make your products or services more accessible to customers while ensuring a steady improved cash flow into your business. Also, as I mentioned above, any tactic that gets invoices paid, or part-paid faster, reduces risk of default.

When setting up payment plans, it’s important to carefully structure them to ensure that payments cover your costs and provide a margin. Additionally, consider using an automated payment system to manage these plans, collecting by direct debit, reducing the administrative burden on your team.

6. Diversify Payment Methods

The easier you make it for customers to pay, the quicker you'll get paid. Offering multiple payment methods—such as credit cards, online payments, and mobile payments—can significantly reduce friction in the payment process.

Your accounting software should have a function that allows you to add a ‘Pay Now’ button to digitally sent invoices. This can be a great way to capture those customers that are happy to deal with payment on receipt.

Consider using a payment gateway that supports various methods, including credit cards, debit cards, ACH transfers, and digital wallets like PayPal or Apple Pay. If you are a trades or similar business, consider equipping your team with a credit/debit card reader, such as a Square Reader, to take payment from the customer when the job is done.

Offering flexible payment options not only improves cash inflows but it can be a hassle-free solution for your customers that enhances customer experience.

7. Perform Credit Checks on New Customers

Before extending credit to new customers, it’s prudent to conduct credit checks to assess their ability to pay. This step can help you avoid customers who have a history of late payments or defaults, which can lead to cash flow issues down the line.

A market leader in the Australian market for reviewing credit reports on businesses is called ‘CreditorWatch’. Here is a link to their website to find out more: CreditorWatch.

For high-value clients or large orders, consider requesting a down payment before work begins. This provides some upfront cash and reduces the risk of non-payment.

8. Outsource Debt Collection

Chasing late payments can be time-consuming and stressful, taking you away from other important business activities. In cases where payments are significantly overdue, it may be worth outsourcing debt collection to a third-party agency.

Professional debt collectors have the expertise and resources to recover outstanding payments more effectively. While they will charge a fee or a percentage of the recovered amount, this can be a worthwhile investment if it means getting paid faster.

I would only recommend this option for those customers that you do not have an ongoing relationship with. Third party debt collectors will likely be much more forceful and threatening than a business owner would be, as they only get paid when they collect.

The final resort of legal action should be avoided at all costs. It is incredibly expensive to obtain a default judgement against a business for an unpaid debt, and even then, there is no guarantee that the judgement can be collected against.

9. Negotiate Better Payment Terms with Suppliers

Cash flow isn't just about money coming in; it's also about money going out. Negotiating better payment terms with suppliers can help ease your cash flow pressures. If you can arrange for 30-day payment terms with suppliers, but receive payment from customers within 7 days, you create a positive cash flow cycle. Try and avoid the other way around, where you have to pay your suppliers faster than you are paid by your customers.

Additionally, consider negotiating discounts for early payments with your suppliers, similar to what you offer your customers. This can further improve your cash flow position.

10. Regularly Review and Adjust Your Strategies

Improving cash flow from customers is not a one-time task but an ongoing process. Regularly review your cash flow strategies and adjust them based on the changing needs of your business. This might involve renegotiating payment terms with customers or suppliers, adjusting discounts or penalties, or exploring new technologies to streamline payments.

Ensure your business has a regularly updated 13-week cash flow forecast to predict future cash flow trends and identify potential shortfalls before they become problematic.

Peace of mind for business owners comes from having the visibility that a cash flow forecast provides alongside having a cash reserve to cushion against unexpected shortfalls. A cash reserve acts as a financial buffer, helping you to cover expenses even if customer payments are delayed.

To build a cash reserve, consider setting aside a percentage of your profits each month. Over time, this can grow into a significant safety net that can protect your business during lean periods.

Where can I get help implementing these tips?

I know how easy it is to advise small businesses on what they should do, but it is so much more difficult to put into practice. Juggling priorities and servicing customers will always push business administration to the back of the queue.

Nevertheless, nothing is more important to your business success than having a strong cash flow from your customers. If you need help implementing these tips, reach out to your accountant or give the team here at GearChange Business Advisory a call. We will be more than happy to help.