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Controlling cash flow

Last updated: 05 April 2022

Controlling cash flow

It is a sobering statistic, but one third of new businesses are no longer trading by the end of their third year. Cash flow is to blame for the majority of these failures. Here we look at the financial pressure points common to all businesses and what you can do to ease them.

Your business plan will help identify how much cash you need. But those (often highly optimistic!) forecasts must be turned into monthly cash flow budgets once you start trading.


How to control credit

Starting out

Cash flow is the balance of all the money which flows into and out of your business each day. It is the actual payments of money rather than what is owed to you by debtors or what you owe to your creditors. You must control credit by putting an effective financial framework in place from the very beginning.

Inflow of cash usually comes from sales, while outflow of cash is money used for expenditure, including your overheads. Salaries are often the largest and most inflexible costs, but stock, raw materials, capital expenditure must also be included. Paying VAT and tax, interest to the bank etc. at fixed times also has a major effect on cash flow.

Start by establishing your terms and conditions and inform your customers. Include them with order confirmations and invoices so customers and traders are in no doubt.

Terms and conditions should include whether business terms are seven days or thirty days etc.

Put the best procedures in place.

Always check invoices thoroughly. Make sure they are always addressed to a named individual in a specific department. Try to include details of the job, a purchase order number and the correct amount of money due (including VAT) in addition to your business terms. Make sure each invoice is dated. Always send invoices out promptly.

Don’t be afraid to send reminder invoices or statements in good time. Call customers if payments are late. Be methodical and chase up largest debtors first. Do not be shy – you have provided a service or product and you need to be paid on time.

All businesses have a legal right to charge late paying customers interest on contracts – although many small businesses shy away from this for fear of offence. A solicitor’s letter or using a debt collection agency can be a very effective way to speed up payments.


Growing the business

As your firm develops you need to maintain a tight grip on cash. You need measures in place to control your cash, manage your suppliers, checking your customers and checking stock.


Stringent cash control

To identify problems and take action quickly you may want to instigate a weekly forecast instead of a monthly one, or even a daily one. For example you could have a weekly forecast of each individual cash payment received from your customer and a planned cash payment out to your suppliers. You will be able to check each day how much money has been received and compare with your forecast. Furthermore, if you only pay suppliers once you have received the money in you will keep a firmer control of finances.

If you know you will be short of cash in a few months time you might consider reducing stock, slowing sales growth or agree extended credit from a major supplier for that period.

Restrict growth to whatever you can comfortably afford to finance and make sure you keep a financial reserve for emergencies.


Managing suppliers

Don’t stick to one supplier out of laziness. Always get three quotes from reputable suppliers – preferable those recommended to you. Go with your gut feeling.

Ensure you negotiate longer credit terms and discounts for larger volumes, so you keep your cash flowing.


Check out customers

Conduct a credit check against customers and make sure you give realistic credit limits. Ideally you will trade with companies that are creditworthy and have a good record of paying bills on time, but there are always rogues out there and an element of risk-taking is inevitable. Always review customers’ credit arrangements on a regular basis; circumstances change fast.


Taking stock

Too much stock will deplete your cash flow, may cause problems with storage and leave you with out of date stock that you can’t shift or have to sell cheaply. On the other hand, if you under stock you may disappoint customers and lose orders. It is a fine balance. Again you must negotiate a good deal with suppliers. Keep shopping around and negotiate longer credit terms and volume discounts.


Financial options for improving cash flow

Overdrafts, bank loans, factoring, invoice discounting, trade finance and venture capital are the main options for improving cash flow. Each option has advantages and disadvantages.



Most useful for short term funding. Overdrafts are easy to arrange and relatively cheap, but you won’t be able to exceed the limit agreed (if you do renegotiate there will be fees to pay). Banks can demand instant repayment, which could seriously compromise your business.



Loans can be fixed for periods of between one and 30 years. Rates can be fixed, variable or at a monthly managed rate. Terms vary from bank to bank and you must shop around. Loans are becoming harder to get – not only do banks not have as much money to lend, but they are also applying far stricter criteria to weed out potential defaulters.



Factoring can free up the cash tied up in unpaid invoices. Factoring firms normally give up to 80% of the value of each sales invoice within 24 hours. The firm then collects outstanding payments on your behalf from your customers. Factoring is particularly useful for fast growing businesses or those that have very high value invoices but have to wait 30–90 days for customer payment.


Invoice discounting

This is similar to factoring, but you still chase up the invoices and collect the money. Invoice discounting advances up to 80% of the value of sales invoices.


Trade finance

Useful for companies who purchase goods where credit terms are not available. The trade financier funds the purchase of goods upfront, making it easier to complete an order.


Venture capital

Limited companies can sell some of the shares in return for an investment in the business. Outside investors such as venture capitalists or business angels expect big profits for taking risks. They will want to sell their shares at some point to maximize their profits (which may not be convenient to you). Don’t go down this route without specialist advice.

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