7 Tips for Managing Small Business Cash Flow in the Time of Late Payments

July 18, 2023

Maintaining positive cash flow is crucial for any small business or startup. This represents more than a simple financial stat. Instead, it ensures you can keep the lights on and pay your employees.

But the process is not always as simple as it seems. Survey data show that roughly a third (32%) of small businesses struggle to pay their bills. Meanwhile, almost half of small businesses (46%) report needing to constantly push customers to pay on time.

Almost half of small businesses (46%) report needing to constantly push customers to pay on time.

Given this environment, the question becomes: how do business owners manage their cash flow when they can't rely on a timely inflow of funds? This article will look to answer that question. You'll learn why the current environment has put cash flows in jeopardy and the steps you can take to protect yourself.

Why have payments become increasingly late

The last several years have presented a cavalcade of economic challenges. The pandemic led into a time of supply chain disruptions, followed by an era of mounting inflation. Now, amid rising interest rates and shaky economic conditions, many experts are predicting a recession on the horizon.

These conditions have led to a rise in late payments. The various economic pressures have forced many companies to make hard decisions (including a spate of recent layoffs at some of the world's biggest companies). Meanwhile, these issues have a multiplying impact as well. Here's how some of the current conditions are impacting your customers:

  • Ongoing supply chain problems have created production disruptions, meaning some companies have delays in filling orders and lower incoming revenues as a result.
  • Elevated inflation has made basic inputs more expensive, forcing many firms to make difficult spending choices.
  • Higher interest rates make borrowing more difficult, creating a cash crunch at some companies.
  • Warnings of a recession have many firms cutting back on their spending, leading to lower sales for their vendors.

How late payments affect small businesses

You've probably gotten used to late payments by now. Every operation has its slower customers or the occasional default. It's all part of running a small business.

However, as economic pressures mount, the threat to your overall business can become more serious. The occasional late payment suddenly becomes a systemic problem.

A study conducted prior to the pandemic showed that about 10% of invoices for small and medium businesses were paid late. And that figure represents a time of relative economic calm. What happens if that figure suddenly spikes?

For this, the pandemic can act as a precedent. One data set indicated that during the height of the COVID emergency, the rate of punctual payments in the U.S. dropped below 30%. That means that businesses faced more than seven out of every 10 payments arriving late (with many never coming at all).

For a look at how the current economic challenges could impact the situation, it's instructive to look at the consumer level. A report from Money.com indicated that 40% of U.S. consumers are currently having trouble keeping up with their bills. Meanwhile, a separate survey showed that almost a third of Americans (32%) have paid a bill late in the past six months.

What does this mean for your business? Even in the best-case scenario, that means lower cash flow than you previously expected, limiting the resources that you have available. However, in the worst-case situation, the consequences can become far more dire.

A wave of late payments at the wrong time could lead to a cash crunch. You might find yourself short with a crucial payment looming, something like payroll or a critical debt payment. Given the seriousness of the situation, it's important to have an action plan in mind, preparing yourself before circumstances reach a crisis point.

Tips for managing cash flow

Now you understand the importance of cash flow and the pressures the current economy has placed on your ability to maintain stability in this area. It's time to take the process a step further. Here are some tips for protecting your cash flow:

Maintain a Cash Cushion

The key to managing cash flow in an uncertain time comes down to flexibility. You want to be able to absorb any unfavorable events. Conversely, you don't want to place yourself in a situation where a late payment from a large client will cause a cascading effect that could threaten your small business.

The key to managing cash flow in an uncertain time comes down to flexibility. You want to be able to absorb any unfavorable events [with an emergency fund].

The best way to achieve these goals involves maintaining an emergency fund. Leave room in your budget to accumulate a cash cushion. This money in the bank will give you the leeway you need to respond to circumstances without needing to panic.

Invoice as Early as Possible

Do everything you can to get paid on time. That involves running an efficient organization. Start by sending invoices as early as possible. That way, you give your client (and yourself) the maximum time to get that payment into your bank account.

Stay in Communication with Your Customers

Your clients represent your partners. Ideally, you can face tough times together, helping each other weather the uncertainty. That process requires strong communication.

Start with a high level of transparency in your day-to-day operations. This includes clear due dates and a detailed explanation of your procedures for receiving payments.

Beyond these basic tasks, have a broader communication plan. Touch base with your customers on a regular basis, especially your larger ones. Understand their businesses and the challenges they face.

At the very least, you'll have the information you need to weigh risk and anticipate potential problems. Beyond that, a strong relationship will help you get priority if a customer needs to make a difficult choice about which vendors to pay.

Develop Prepay Options

As much as possible, get your money upfront. Prepay options let you get the cash ahead of time. As a result, you eliminate the worry about eventual payment.

Offer discounts or other incentives to convince customers to provide payment prior to receiving your products or services. Or, for clients with a questionable payment history or if economic conditions demand it, switch to a complete "pay as you go" structure.

Create Incentives for On-Time Payments

Have a structure that encourages your customers to pay on time. Potential policies include discounts for early payments and penalties for late payments. Make sure these incentives are clearly communicated to customers, so they understand your expectations.

Set Collections Procedures

What will you do if a client falls behind on a payment? Don't improvise as you go. Have clear policies in mind. Detailing these procedures ensures that you collect as quickly as possible. They will also help you set expectations as the process moves along.

Have a Financing Plan in Place

What will you do in a cash crunch? Having a contingency plan will limit the possibility you'll be forced into panicked decision-making.

Shop around for financing options. Set up safety nets like lines of credit. At the same time, build up relationships with lenders and potential investors. This will give you someone to contact if you reach a crisis.

Keeping control of your cash flow

Unfortunately, several economic challenges have made payments from clients and customers increasingly late. The result is a strain on the cash flow of small businesses and startups.

However, you can take steps to minimize your risk. By using the information provided in this article, you can better manage late payments. This way, you improve their chances of receiving on-time payments in the future.