A profitable business can still run out of cash. It happens when money goes out to staff and suppliers weeks before it comes in from customers, and in the UK, where business customers routinely take 45 to 60 days to pay a 30-day invoice, that gap is the normal condition of trade. Closing it is mostly a matter of discipline rather than money. This guide works through the levers in roughly the order a business should pull them.
Invoice promptly and accurately
The payment clock does not start when the work is done; it starts when the customer receives a correct invoice. A business that invoices at month end for work completed on the 3rd has given its customer four weeks of free credit before terms begin. Invoice on completion, or weekly for continuing work, and send it to the right person electronically.
Accuracy matters as much as speed. An invoice missing a purchase order number, addressed to the wrong entity or showing an unagreed rate will sit in the approval queue until someone queries it, often a fortnight later. Confirm the PO, billing address and price before you raise it, and attach the evidence (delivery note, timesheet, completion certificate) so there is nothing to query.
Shorten payment terms where you can
Standard UK terms are 30 days, but nothing obliges you to offer them. Smaller customers will often accept 14 days if it is on the quotation from the start. Larger customers may have fixed supplier terms, but ask whether they run a prompt payment programme; signatories to the Fair Payment Code at Gold level commit to paying 95% of invoices within 30 days. State your terms on every quotation and invoice, with the actual due date rather than "30 days", and make clear that you charge statutory interest on late payment.
Deposits and stage payments
For project work, bespoke manufacturing or anything that requires you to buy materials up front, ask for a deposit on order and stage payments at defined milestones. A 30% deposit, 40% at a mid-point and 30% on completion turns a 90-day cash gap into three 30-day ones and shows early whether a customer is a reliable payer. Customers who object to any deposit on a large order are telling you how they will treat the final invoice.
Credit-check new customers
The cheapest bad debt is the one you never take on. Before extending credit, check the customer's filed accounts, payment history and any county court judgments through a credit reference agency; a report costs a few pounds. Set a credit limit for each customer based on what you could afford to lose. A customer with a weak report can still be served, on pro-forma or deposit terms.
Run a credit control routine
Businesses that get paid on time are rarely the ones with the most persuasive credit controller. They are the ones with a routine that runs every week without fail:
Before the due date
A courtesy statement a week before due, confirming the invoice has been received and approved. This catches lost invoices and missing PO numbers while there is still time.
Day 1 overdue
A polite reminder by email, the day after due date. Not a week later.
Day 7 overdue
A telephone call to the accounts payable contact, asking for a payment date. Record what they say.
Day 14 onwards
Escalate: a call to your commercial contact, a formal reminder stating that statutory interest applies, then a letter before action. Stop supply if the account is significantly overdue.
Accounting software can automate the statements and reminders. The telephone calls are what actually move invoices, and they need a named person and a fixed afternoon each week.
Early-payment discounts: do the maths first
A prompt-payment discount feels cheap because the percentage is small. Annualised, it is one of the most expensive forms of finance a business can use.
Illustrative example The real cost of "2% for payment within 10 days"
- Normal terms
- 30 days
- Discount offered for payment within 10 days
- 2% of invoice value
- Days of credit given up for the discount
- 20
- Cost as a rate over those 20 days (2 ÷ 98)
- 2.04%
- Periods of 20 days in a year (365 ÷ 20)
- 18.25
- Equivalent annual rate
- About 37%
Figures are illustrative estimates only and do not represent a finance offer.
If customers would otherwise pay on day 30, you are paying 37% a year for the acceleration. If they habitually pay on day 55 and the discount gets them to day 10, the equivalent rate falls to around 16%, which starts to compare with other options. Offer it only to specific customers whose behaviour you have measured, never as a blanket policy.
Use your late payment rights
Under the Late Payment of Commercial Debts (Interest) Act 1998, business customers who pay late owe statutory interest at 8% over Bank of England base rate, plus fixed compensation of £40, £70 or £100 per invoice depending on its size, as set out on gov.uk. You do not have to charge it, but printing the right on invoices and mentioning it in the second reminder changes behaviour. For a persistent late payer, the compensation alone on a dozen invoices is worth claiming.
Negotiate supplier terms
Cash flow is a gap between two dates, and the second is as moveable as the first. Ask suppliers for 30 or 60-day terms once you have a payment record with them; many will agree rather than lose the account. Pay on the due date, not early, unless an early-settlement discount beats your cost of money (the same maths as above, in reverse). Consolidating purchases with fewer suppliers often earns better prices and better terms.
Manage stock and work in progress
Every pound of stock on the shelf is cash that has already left the bank. Review slow-moving lines, sell off obsolete stock even at a loss, and order against forecast rather than habit. In service and project businesses the equivalent is work in progress: jobs completed but not yet invoiced, or invoiced but not signed off. A monthly WIP review that asks "why has this not been billed?" often releases more cash than any financing.
Build a 13-week cash flow forecast
Most cash crises are visible six weeks before they arrive, to anyone who is looking. A 13-week forecast is the standard tool: a column for each of the next 13 weeks, starting from today's bank balance, listing expected receipts (by customer, on the date they actually pay rather than the due date) and committed payments (wages, PAYE, VAT, rent, suppliers, loan repayments). The closing balance each week shows the pinch points.
Update it every Monday. Its purpose is not to be right; it is to show you three weeks in advance that week nine is a problem, while you can still chase a receipt, delay a purchase or arrange funding.
Where invoice finance fits
Once the free levers have been pulled, a business selling to other businesses on credit may still have a structural gap: weekly wages against 60-day customers, or growth that outruns the cash it generates. That is the problem invoice finance was built for. A factoring or discounting facility advances typically 70–90% of each invoice within days of issue and grows as sales grow, which an overdraft does not. For occasional gaps, selective invoice finance funds only the invoices you choose.
It is not free, and it is not a substitute for the steps above: the provider will chase the same invoices and charge for doing so. Treat it as the last lever rather than the first, and compare it with a loan or overdraft using the invoice finance vs business loans comparison before committing.
Worked example: a £600,000 business
A commercial cleaning contractor turns over £600,000 a year, invoices monthly in arrears, and its customers pay on average 52 days after invoice. Wages are paid weekly. Its sales ledger averages about £85,500 (£600,000 × 52 ÷ 365), and the directors are routinely drawing on a £30,000 overdraft to cover month-end payroll.
Illustrative example Cash released by changing habits, before any finance
- Invoice weekly instead of monthly in arrears (average 15 days earlier)
- Debtor days 52 to 37; ledger falls by about £24,700
- Weekly credit control routine (reminders on day 1, calls on day 7)
- Debtor days 37 to 31; ledger falls by about £9,900
- Negotiate 30-day terms with the cleaning supplies wholesaler (from 14)
- Around £4,000 of payments deferred permanently
- Approximate cash freed
- £38,600, enough to clear the overdraft
- If a structural gap remains: factoring at 85% on a £51,000 ledger
- Up to about £43,000 available, at an estimated cost of 2%–3% of turnover
Figures are illustrative estimates only and do not represent a finance offer.
The first three rows cost nothing but attention. The fourth is there for the business that wins a contract doubling its turnover and needs its funding to double with it.
Pulled the free levers and still short at month end?
Tell us about your business and we will explain whether invoice finance is a sensible next step and which type to look at.
Frequently asked questions
What is the quickest way to improve business cash flow?
For most businesses the quickest gain is invoicing on the day the work is done rather than at month end, and chasing every invoice the day it becomes overdue. Both cost nothing and can cut debtor days by a week or more within a month. Asking for deposits on new orders is the next fastest.
Is offering an early-payment discount a good idea?
Only if the cash is worth more to you than the discount costs. A 2% discount for payment in 10 days instead of 30 is equivalent to an annual rate of around 37%, far more than most forms of finance. It can still be worthwhile for a specific slow-paying customer, but it is rarely a good standing policy.
How does debt factoring improve cash flow?
Debt factoring releases an advance, typically 70% to 90% of invoice value, within days of raising an invoice, rather than waiting the 30 to 90 days customers take to pay. The business receives most of its sales income almost immediately and the provider collects the invoice from the customer. The facility also grows with sales, so it supports a growing business in a way a fixed overdraft cannot.
What is a 13-week cash flow forecast?
A 13-week cash flow forecast is a week-by-week projection of money in and money out for the next quarter, starting from the current bank balance. It is short enough to be accurate and long enough to show problems before they arrive, which is why lenders, accountants and turnaround specialists use it as the standard cash management tool.