Three ways to manage cash flow when customers pay late

Late payments are putting increasing pressure on UK small businesses, with many having to manage their own finances while waiting for customers to pay.

According to research released this week, 60% of SMEs say customers are taking longer to pay than they were a year ago. What’s more, the survey also found that businesses are now owed an average of £72,000 in outstanding invoices, rising to £143,000 among mid-sized businesses.

Many small businesses are already operating against a backdrop of rising energy costs, tax and administrative burdens, declining high streets, and business crime. When late payments are added to these existing pressures, cash flow can quickly come under strain. 

So, if customers are paying late, what can you do to manage your cash flow?

1. Keep on top of payment terms and outstanding invoices

One of the easiest steps you can take is to make sure invoices are sent promptly and payment terms are very clearly defined. To protect liquidity, it might be worth considering shortening payment terms for new or historically slow-paying clients – a step 40% of SMEs say they are now taking. Sending payment reminders before an invoice is due and following up immediately on overdue accounts can keep cash moving.

With supply chain strain becoming increasingly common, running credit checks on new clients and setting appropriate credit limits can also help protect your business against bad debt and customer insolvencies. Also, tracking which clients regularly delay payment will help when it comes to forecasting cash flow more accurately, as it will allow you to spot potential bottlenecks early. 

2. Consider invoice finance

If you regularly have significant amounts of money tied up in unpaid invoices, invoice finance could help to bridge the gap between completing work and getting paid for it.

Invoice finance can release some of the money owed to your business before customers pay, giving you earlier access to cash. However, be mindful that there are costs and eligibility requirements to consider, and the amount you can access will depend on the provider and your circumstances. It’s always worth comparing options before deciding whether invoice finance is suitable for your business.

3. Build a cash buffer

Building up a cash reserve in a business savings account can give you more flexibility if customers take longer than expected to pay, while also allowing you to earn interest on money you don’t need immediately.

Setting money aside is generally easier when cash flow is stronger. So, if your business has seasonal peaks, it might be worth using periods of higher revenue to build up a reserve, giving you a buffer to draw on when trading is quieter or customer payments are slow.

It might also be worth factoring potential late payments into your cash flow planning alongside predictable costs such as tax, VAT and rent, so you have a clearer idea of how much money you want to keep accessible.

Keeping cash flow moving

Late payments aren’t always within your control, but you can plan for their impact. Keeping track of outstanding invoices, forecasting when money is likely to arrive, and having a clear plan for covering costs can all help your business manage cash flow when customers aren’t able to pay on time.