Maximising cash flow

Late payments are a major cause of cash-flow problems for small businesses. Here’s how to tackle them

Late payments have long been the scourge of small businesses. The failure of often larger companies to pay SMEs on time leads to cash-flow problems that damage the health of the business and, increasingly, can risk the mental health of the business owner.

The statistics are sobering. The majority of small firms have been hit by late payments, according to a survey of more than 4,000 SMEs by the Federation of Small Businesses (FSB).1 The sum of late payments due to small businesses rose to a staggering £23.4 billion at the end of 2019.2

But what can you do? This article will provide tips for managing cash flow and practical advice on how to ensure your business – and your health – do not suffer if you are being forced to chase customers for payments.

“The critical step here is a robust cash-flow forecast,” says Nigel Fox, one of our Business Growth Advisors. “A rolling 13-week cash flow will identify any pinch points. Knowing where the potential problems are in advance is essential for managing cash flows and keeping suppliers informed about when payments can be made and, if necessary, arranging payment plans.”

Late payments are frequently the cause of cash-flow problems. While successive governments have attempted to address the problem, progress has been slow. Signatories of the Prompt Payment Code, which is run by the government’s Small Business Commissioner, must pay 95% of their invoices from businesses with fewer than 50 employees within 30 days, although participation in the scheme is voluntary.

The damage to the business can be significant. More than a quarter (26%) of business owners say late payments have left them struggling to pay their own suppliers, according to a survey of more than 500 businesses by accountancy-software provider Xero and PayPal. Many owners resort to using personal savings, with 52% of business owners saying they have used their own cash, or that of their friends and family, to keep their business running.3

Understandably, the burden of poor cash flow caused by late payments can take its toll on the mental health of entrepreneurs. Plenty of small business owners worry about late payments even when they are not at work – and more than a few will have considered accessing professional help as a result of anxieties caused by late payments.

What to do? If cash flow becomes an issue, there are a number of potential solutions. Perhaps the simplest is to talk to your bank and ask about available options such as payment plans. There are other possibilities, too: “Invoice discounting debtors is a quick way of bringing cash in if you have credit-worthy customers, although it is expensive,” says Fox. “Offering early-payment discounts to some key customers might also alleviate short-term issues.”

Other options include arranging payment plans with suppliers or HMRC, or, if your business has significant fixed assets such as property, looking at doing a sale and leaseback of the asset.

Should late payments become a persistent problem that continues to affect cash flow, more drastic action might be required. The FSB advises asking whether you are prepared to continue supplying that customer on credit terms. If not, it might be better to lose the customer than supply goods or services, not get paid and then suffer a bad debt.4

The FSB also runs a debt-recovery service, which has so far helped more than 10,000 small companies chase late payments. Other groups offer similar services. Ultimately, the best route to being paid on time comes down to the basics. Ensuring your invoice is correct and maintaining good relations with your customer can often be enough to ensure prompt payment and healthy cash flow.

“Communication is key here,” says Fox. “Build a strong relationship with the accounts-payable team at the customer. Make sure you understand their payment processes and make sure you get your own admin right first time. For example, quoting the correct purchase order, making sure the invoice is correct and that services have been fully delivered. Be prompt in dealing with queries.”


This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.


Late again: how the coronavirus pandemic is impacting payment terms for small firms, Federation of Small Businesses, June 2020 (Based on a survey sample size of 4,228)

UK SMEs face debt burden of £23.4 billion, Pay.UK, November 2019

The state of late payments: the effects on businesses and their owners in 2019, Xero in partnership with PayPal, July 2019 (Based on a survey sample size of 532)

How your small business can deal with late payments, Federation of Small Businesses, March 2021