Boosting SME cash flow through payment efficiency

A high proportion of company collapses, especially among small and medium-size enterprises (SMEs), are the result of cash flow problems. Even However adept a business is at spotting a gap in the market or servicing a particular segment, if money is being spent more quickly than it is coming into the firm, it can be a recipe for disaster.

Negative cash flow is not uncommon among startups, which are likely to be spending their initial financing on product development, hiring and marketing before their sales start to ramp up. But among more established businesses, cash flow problems are typically a sign of inefficient payment systems and perhaps even poor management or bookkeeping.

Recent research suggests that late payments cost British SMEs as much as £684m a year, with the average invoice being almost six days overdue. The issue of late payments, and their impact on cash flow, has become even more important as a result of the cost increases seen by UK businesses due to the inflationary period of the past year. 

Successive governments have promised to take action on late payments, specifically relating to payments due from large to small businesses. The latest such pledge was made in December 2022 as small business minister Kevin Hollinrake launched a review into the problem.

Whilst legislation would be a welcome help to small business, there are actions owners can take to improve their own cash flow positions. 

1. Gain maximum visibility

The best way to nip cash flow problems in the bud is by ensuring you can spot warning signs as early as possible. Checking your business’s cash position on just a monthly or even weekly basis increases the risk that problems could go undetected for too long. Using cash flow modelling software, you can see in real time what the impact of rises in costs or overdue invoices will be and take necessary, pre-emptive action. 

2. Incentivise early payment

Customers can be encouraged to settle bills on time by offering a small discount for prompt payment. Conversely, you could consider adding interest charges to overdue invoices. Incentives should also play a significant role inside the company: by training workers in the right way and developing a cash-focused culture across the business – perhaps with the targeted use of bonuses – you can ensure that staff prioritise the firm’s cash position above all else.

3. Bite the bullet on late payers

By analysing payment data, you should be able to identify those customers who regularly pay late. You can then decide whether to continue your relationship with them: you may be better off in the long-term by reducing your dependence on these clients and seeking to develop your business elsewhere.

4. Improve payment efficiency

The easier it is for your customers to pay you, the less cash flow pressure you’re likely to face. Using the latest payment technology can considerably cut the hassle that clients face in paying for your goods or services. International payment services can be especially useful given the delays that have traditionally been associated with cross-border transactions. The ability to get paid instantly by customers all over the world should also give UK SMEs greater confidence to expand into new markets without worrying about the cash flow implications. Mallet believes payment efficiencies can lead to competitive advantage.

Even successful and profitable businesses can sometime experience cash flow problems. At best, this can stall necessary investment and growth, and, at worst, it can totally derail an SME. Late payments are a significant contributor to cash flow headaches for SME owners but, with the right approach to culture and systems, their impact can be limited.