SME owners often say that their biggest business concern is their cash flow. While larger companies can withstand dips in cash flow (within reason), smaller companies need positive results to keep afloat and grow.
One key element in producing positive cash flow is payment from invoices. Invoice payments inject cash into the business, allowing it to settle ongoing costs like overheads or wages, and help the business to grow. Yet late payments to UK SMEs total up to £36.5bn – you can imagine the cash flow problems that arise.
What, then, is the solution? We believe that a two-pronged strategy is required, involving both invoicing and financing.
An accounts receivable is cash owed to a business by its customers or debtors, and are usually recorded as current assets in a balance sheet. They are collectable by the creation of an invoice.
Businesses can streamline and simplify their invoice collection process in order to make it easier for clients to pay up. Methods for doing so include:
1. Clear terms and conditions
State your terms and condition – especially any deadlines – as clearly as possible on invoices. This will make clients more aware that they need to pay up, and soon. Revise existing invoice templates to include payment terms and penalties for tardiness.
2. Offer incentives
Offer clients incentives for early or prompt payment. Entertain early payments with discounts or prompt payments with free gifts, for example.
3. Use helpful software
Use automated invoicing software that will send electronic copies of invoices and reminders to clients. Many businesses send invoices as PDF files via email as this is quicker than waiting for printed invoices to be sent by post. The quicker a client receives an invoice, the more time they have to pay up before the deadline.
4. Don’t rule out a personal touch
Some clients may still not fulfill invoice payments on time. Set reminders for contacting clients offline about late payments. They may note the importance of paying up if your business has taken the time out to contact them personally.
One way in which to improve your business’s cash flow if by acquiring invoice finance, a form of asset-based funding (with the receivables as assets). The process is simple: the invoice finance provider will advance a business up to 90% of the value of an unpaid invoice. This could happen in as soon as 24 hours. This boost in cash flow can be used to run the business. Once the client has made the payment, the invoice finance provider will retain a small fee and forward the rest of the value of the invoice to the business. Businesses can also have the option of having providers chase up payments on their behalf or to have providers keep the arrangement in confidence.
As funds are raised alongside invoices, the volume of funding is proportionate to growth. This means that a business does not need to agree to a specific loan amount, but can receive funding according to the amount of work it receives and does. This allows a business ready cash that it can use to run its operations, ultimately giving it the financial space in which to flourish and grow.