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Any small business owner will tell you that cash is king. But what does that mean in practical terms? Put simply, businesses go bust in the long term through lack of profit, but in the short term, they fail because they don't have enough cash to pay their bills.

As the life supply of a business, managing cash flow effectively is critical for success. The key to keeping cash flow fit and strong is ensuring there is a careful balance of funds coming into and out of the business so that you can pay suppliers and invest in new ventures.

The issue of late payments is exacerbating the cash flow challenge for small and medium sized businesses. In this article, I will give my five top tips to help you take control and streamline your firm’s cash flow:

  1. Know your customers like the back of your hand
Familiarise yourself with all your customers. This is the first step in knowing where your funds are coming from and going to. Knowing your customers’ liability can help you understand what type of organisation they are and the strength of their business. Tracking when your funds are due to come in and out of the business on a monthly basis provides clarity of when payments are due. This will enable an efficient working relationship with your customers and combat late payments occurring in the first place.
  1. Always be prepared
Prior preparation and planning prevents poor performance. In a perfect world, your business will always run smoothly. But if unforeseen circumstances occur, make sure your clients and suppliers understand that they can trust you to ensure their finances remain in good hands.

Step one here is making sure you have credit insurance in place, in case a customer does not pay. Insurance companies and brokers offer tailored credit insurance to help protect against non-payment by customers. Get an understanding of whether your customers are at risk of failure and be sure to consider the business impact of late payments, especially by your most important customers. Don’t let other business’s failures be a barrier to your success.

  1. Agree your payment schedule
The average small business is currently owed up to £12,000 in outstanding invoices, but this doesn’t mean your firm has to be one of them. Plan your payment schedule to prevent any cash flow headaches. Ensure that you formally agree terms in advance with partnering companies and provide clarity in all that you do. For example, making the payment due date clear on invoices, and having a written and signed confirmation of the agreed payment terms, can ensure all parties are aware of the schedule.
  1. Save time and simplify chasing
Businesses spend almost 350 hours a year chasing late payments – hardly a fast-track to success! There are tools out there to help you with chasing payments, so use them.

Embracing technology which automates and simplifies your credit management can save your business precious hours in back office administration, freeing up your time and money to focus on putting more value into your business.

  1. Play fair with your suppliers
Good business karma starts with treating your suppliers fairly. Treat your suppliers the way you would like to be treated as a business. Late payments from your side could result in damage to their business. Paying them by the due date leads to a happy supplier relationship. This is one of the simplest quick wins for business success. Being a fair, responsible business might also play in your favour in the future. Good relationships can mean better price negotiations, priority on your orders and preferential treatment generally.

By Mark Duncan, product manager, Sage UK