Quick tips on how to improve cash flow

Revolut Contributor

 · 07/31/2020  · 07/31/2020

The challenge of how to improve cash flow is rarely far from the thoughts of most business owners. However, this subject strikes particular fear into the heart of SMEs because they are less resilient to bumps in the road. Here are some rapid actions that will help to keep the wheels moving smoothly.

How can negative cash flow be improved?

In simple terms, negative cash flow means that a business has a negative cash balance at a given moment and is actively depleting its reserves of liquidity. More than half of the small businesses in the UK were cash-flow negative as of February 2020, according to UHY Hacker Young chartered accountants. The situation has almost certainly worsened since then due to the pandemic.

The first step towards rectifying this woe is to get your finances up to date. “Your goal is to understand where the business is right now, and how long it will be before the cash runs out”, says Mac Whitely of UHY Hacker Young, who recommends cloud-based accounting tools, such as Xero or Quickbooks. Cloud platforms enable the business to work smoothly in tandem with whoever handles their finances.

Next, you need to identify where the holes are by monitoring cash flow and ideally creating a forecast. We cover cash flow forecasting in detail here but a great way to get this idea moving is to check if your accounting software offers plug-in tools which will automatically help to estimate this.

Once you know why the bucket is leaking, you can focus on how to repair it. This fix might involve applying for the new government reliefs or seek other financing sources.

Leaving aside these more structural solutions, here are a few practical tips to improve cash flow.

How can small businesses improve cash flow?

The average number of days that it took for a UK small business invoice to get paid was just shy of 40 in February 2020, according to insights based on anonymised user-data supplied by Xero. This is ten days more than the standard 30-day terms, which means many businesses are giving their customers a free loan. These simple steps should make a big difference:

  • Check the details (Do your invoices always show the correct client details and clear terms?)
  • Factor invoices (Can you release cash quicker by raising finance against invoices owed?)
  • Review inventory (Is your business lumbered with slow-moving stock? If so, get rid)

How do you increase monthly cash flow?

Now that you’ve verified you don’t have a warehouse full of unwanted junk and that shoddy invoices are not letting the whole team down, it’s time for some more subtle ways of how to improve cash flow.

  • Early-payment discounts/penalties (Could you incentivise your customers to pay early?)
  • Pay suppliers slower (Check your suppliers’ terms and use automated payments cannily)
  • Lease vs Buy (Can you reduce monthly outgoings by leasing assets you don’t need to own?)

For a small business, the premise of how to improve cash flow is to level the playing field by doing the basics correctly and finding tools that can automate mundane tasks. Top of this list is credit control.

While most accounting software will send out invoice reminders, the brand new Revolut Business invoicing tool will also automatically track whether the money then reaches your account on time.

This feature is akin to investing in a virtual credit-control team. Let our software do the hard work of chasing-up those overdue invoices while you shmooze your next client. Bonne chance!

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