How to Improve Cash Flow for Small Business

Cashflow management

Cash flow is the life blood of every business. It is consistently one of the top challenges I have found SME’s face. There are thousands of examples of profitable businesses (large & small) that have failed – purely due to a lack of cash.

In my experience, there are a number of ways small business owners can improve their cash flow. Some apply to every single business, regardless of industry, whilst others are industry-specific. Here are a few of the things we work on with clients to improve their position.

Adjust your Attitude

When a business has debtors – it means clients have your money. You should never forget this! If you have delivered a great product or service, there is no reason terms should not be adhered to. Most business owners avoid asking for money and often do so in almost an apologetic fashion. Instead, we must adopt a confident, assertive mindset. Clients can smell weakness and will take advantage of you if they think you don’t mean business.

Use someone with training and a rehearsed collection process to lock clients in to payment. Use the right person for this important job. Don’t put the timid office junior in charge of collections.

Understand your Cash Cycle              

Your sales cycle is the time between buying the stock, taking the order, fulfilling the order, raising an invoice and then getting paid. Firms with a long cash cycle will have cash flow challenges. The shorter the cycle, the sooner the cost of buying the stock and fulfilling the order can be replaced by the cash from a profitable transaction.

Challenge your Thinking

Don’t accept that your debtors, inventory or work in progress position has to be the way it is. Your accountant should be able to help you benchmark against industry standards. Check out how you compare to the best in your industry. Then check out how the best in completely different industries perform, and examine if any strategies can apply to your business.

Why not ask for payment in advance? Could you ask for progress payments? In order to avoid carrying excessive stock will your suppliers deliver smaller amounts of stock more regularly or even better on consignment?

Don’t Face the Problem on Your Own

Get outside help from an accountant and or advisory board. If your accountant isn’t helping you to look to the future and only gives you historical reports – sack them. You deserve better. A pro-active accountant can be very useful in challenging your assumptions, highlighting future opportunities and holding you accountable for implementation of business improvements.

If you can’t afford an accountant, put together an advisory board of respected friends or family. Make sure they know you want them to be firm with you.

Move your Financials to the Cloud

With cloud-based accounting solutions such as Xero or MYOB Essentials now readily available, there is no reason not to be working closely with your accountant to monitor cash flow in real time. Quicker information utilising cloud software means you can work in partnership with your accountant.

I recommend businesses work with their accountant to develop a 3 way budget (Profit and Loss, Cash Flow & Balance Sheet). This budget should include the timing of BAS payments and tax obligations - obligations we know are coming but business owners are often blind to.

Measure monthly - Measuring your performance against budget highlights your position and allows you to act sooner.

Cloud solutions such as Xero have a ton of add-ons available which can automate the collection process for the time poor. Check out tools such as Debtor Daddy or SMS My Debtors -- they really work well.

Measure your Debtor Days & Monitor it with Discipline

Once you have a robust cloud based accounting system working in real time, tracking key cash flow indicators becomes far easier. Measuring Debtor days is a great way of tracking how efficient you are in collecting client funds. Debtor days record how long it takes to get paid on average in days.

A business with 1.2 million in turnover with debtors of $200,000 has debtors of approximately 60 days. Improving the collection rate by just 12 days through implementation of appropriate strategies will bring a cash inflow of $40,000 to the business. With Debtor days, the size of a business doesn’t matter. Bringing the figure back to days makes it easy to benchmark performance.

Make debtor management an important part of your business and ensure it is allocated sufficient resources and time in your diary. Don’t wait until your days away from making the monthly wages bill before chasing up cash.

Invoice Instantly & Make it Easy to Pay

I once had a Plumbing client from the old school. He would work very hard all month and get around to invoicing at the beginning of the new month ....if he remembered.  To pay him, clients had to pay via cash or cheque because he didn’t take any cards. He couldn’t understand why he was so busy but never had any money. We sat down and discussed how customers don’t pay for what they have yet to be invoiced. He was automatically lengthening his cash cycle by up to 30 days with this approach.

Our solution was to move to instant invoicing and it has turned his cash flow around. He now invoices at the completion of his job (easily done on-site using his iPad App for Xero ). His clients now receive the invoice on the date of service via email to their inbox, together with the link taking them through to online payment options such as BPAY or credit card.  He also carries around a mobile EFTPOS unit to make it even easier for clients to pay on the spot.  The nominal cost of this type of solution pays for itself after the first client.

Confirm All is OK Upon Delivery of the Service or Product

Unhappy clients don’t pay. Confirm your client is happy immediately. If anything needs rectification, it can then be done ASAP. Have the client sign off the job has been completed to a satisfactory level. Once the client has confirmed the service or product that has been supplied, your leverage in expecting payment is considerably increased.

Know the effect of your Margins

Every sale is not a good sale. Be prepared to say no.

Make sure you and your sales team understand the impact of a discount to the ultimate cash position.

As an example – if you normally sell your product at a Gross Profit Margin of 30% and you discount your prices by 20% - you will need to sell 3 times as many units of your service to pay make the same gross profit in dollar terms.

Conversely, the same business can increases prices by 10% increase and afford to lose up to 25% of customers before you will earn less gross profit. Measure & test the results – you might get a pleasant surprise as to how few customers you lose and the impact on your cash will delight you.

If you have a sales team they have to understand this concept. Only incentivise team members based on Gross Profit achieved (and banked) rather than revenue on its own. If you must discount to ensure payment terms are brought forward significantly.

Offer Discounts on Early Payment – Don’t Charge Late Interest

People love a bargain. Once you understand your margins and also the cost of slow payment/collections, you can offer as a policy small discounts for payment in advance or before due date. You’ll be surprised how your historically slow payers will jump at small discounts as low as 2.5%.

I like this approach far better than the idea of charging late interest. It’s a far easier sell for business owners to offer a discount to customers. Customers feel like they have had a win. Invariably, the collection of the late interest becomes problematic and leaves a bad taste in the clients’ mouth.

Sack your Slow Paying Clients – They Suck the Life Out of You and Cost You Money

Regular analysis of your debtors will highlight to management the slow or non paying clients.

Clients that take 180 days to pay will drain you of every ounce of enthusiasm you have. Be bold, take a stand and invest this same energy into servicing your A class clients. Once you’ve done it a couple of times, it’s empowering. I guarantee you and your team will have a spring in your step and your cash position will improve dramatically.

Keep your Bank & Telco Honest 

Are you being penalised for your loyalty?

Banks, internet providers and phone companies are bandits for this type of thing. They offer cheaper rates for new clients whilst loyal long term clients remain on older expense plans. A call to your bank or ISP (after doing your research about competitor options) can never hurt. Ask them what would be the best that they can do for you in order to stop you from moving on.

In the last 4 months I saved .39% off my mortgage whilst my ISP went from $110 month to $70 month with the same provider with more speed/data. This was all done after 20 minutes of research and a couple of calls, all whilst staying with the same company.  

Speak to your suppliers

With your suppliers - If you don’t ask, you don’t get. If you are paying COD – ask for 30 day terms. If you already have a supplier facility in place - negotiate longer payment terms or discounts for early payment. This will free up cash within the business.

If you are struggling to pay your creditors – speak to them early and arrange a payment plan if necessary. Most creditors will work with you if you take a proactive approach regarding a repayment plan.

Structure your Finance Appropriately

A sound financing plan is critical to good cash flow management. Attempting to finance long term assets out of cash flow or short term lending will leave the business in a cash deficit. Most people don’t attempt to pay their home mortgage off in 3 years – yet many business owners will try to pay off equivalent size assets in a similar time. As a rule – try matching the lending period to the approximate life of the asset.

An overdraft is an ideal facility to cover short term cash challenges. It’s best to arrange such a facility well and truly before it is required.

Debtor Financing

Debtor financing allows an external funder to pay you now.... for a fee. Debtor financing can be expensive but if it allows you to take on work at great margins, it can be a very useful solution for growing businesses. It allows business owners the confidence to go out and win the work whilst knowing they can fund the cost of production. A good accountant or financial advisor can help you arrange this type of facility with a financier – typically not with the mainstream banks.

Liaise with the ATO

Obligations to the ATO are the most common cause of cash flow headaches for SME’s.  If this occurs, stay close to your accountant. They should be able to arrange repayment terms and maybe even have late interest remitted, making it far easier to get on top of things.


Warwick Jackson

Warwick Jackson

Director at Berkmans Chartered Accountants

I am passionate about helping small business owners fulfil their potential. Many business owners become slaves to their business. I have a strong belief they should enjoy the ride and be free. Happily married to my wife Pippa & a father of young twins, family time is important to me. I’m actively involved in Australian Rules football and despite my age – I still get out on the football field and play the game I love.


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Jeff Gordon

Jeff Gordon , Principal at Prestige SME Business Solutions

By converting to Xero software, as a Business Owner you can turn on your PC, Ipad or IPhone every day and the KPI Dashboard that is great and will be even better in June 2015 when it is upgraded and improved. You will see Cash Flow from every angle, money in and out every day, all bank balances, problem debtors, main creditors you owe etc. Cash Flow is KING. You must watch it every day!

Jeff Gordon

Jeff Gordon , Principal at Prestige SME Business Solutions

MS Data Intelligence (Michael Silberthau) has created a brilliant customised XL spreadsheet model that will make sure you control your Cash Flow really well. The "What If" option is great. Check out www.msdataintel.com.au, use this great option and sleep better at night!