Pay4 Guide: Cash flow is the beating heart of any business. Successful cash flow management not only increases survival rates, but improves productivity, reduces debt, and increases liquidity. Our excellent guide provides all the key tools business owners need for cash flow success.

1. The Business Owner’s
Guide to Cash Flow Success

2. ExecutiveSummary
Cash flow. The beating heart of any business, it’s also the single biggest killer of
UK SMEs, with over 80% citing poor cash flow as their primary reason for failure.
An ongoing balancing act between cash inflow and outflow, successful cash
flow management not only increases survival rates, but improves productivity,
reduces debt, and increases liquidity to fund future growth.
Here we provide the ultimate guide to cash flow success for business owners.
Everything you need to get a firm grip on your cash flow and set your business up
for maximum success.
We offer advice on how to spot the causes of cash flow problems and what
warning signs to look out for so you can be one step ahead.
We also show you how to get money coming into your business faster through
smarter invoicing and debt collection, how to optimise your supply chain, deal
effectively with late payments, prioritise your own debts, and how to keep
effective budgets and forecasts to maximise growth and inform your future
investment strategies.
It’s time to take back control of the money in your business, make the most of the
opportunities it provides and set yourself up for future success.
Rob Keown-Boyd
CEO & Founder
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3. Contents Executive
Summary
Recognising Cash
Flow Problems
Cash Flow
Defined
8 Steps to Cash
Flow Success
Good Cash Flow
Management
Conclusion
page 1
page 3
page 4
page 7
page 9
page17
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4. Cash Flow Defined
Cash flow defined What is cash?
Cash flow is called many things: “The lifeblood of all businesses”,
or “the primary indicator of business health”. And how many
times have you heard the saying “Cash is king”? They all mean
the same thing: cash flow is the most important thing to the
success of your business.
Essentially, cash flow is the movement of money in and out
of your business. It is the measure of your ability to bring in
enough money to pay your overheads such as rent, insurance,
and salaries, and business expenses such as supplier invoices. It
also remains one of the top accounting problems reported by
business owners.
Cash does not mean profit. Cash is the money actually received
and spent in the process of doing business. Profit is the money
made after all expenses are deducted from revenue.
Althoughitisimportanttofocusonbuildingaprofitablebusiness,
it is crucial that you know how much money you have in the bank.
Your sales may be great, but your business can be exposed and
your bank account empty, even if only a few customers decide
to pay their invoices later than usual. This is why cash flow
management is so imperative to a sustainable business model.
Cash flow looks at the timing of money changing hands, and
whether it’s aligned in a way that means you can pay your
expenses when you need to. Business failure rears its ugly
head when demands for cash, from your employees, suppliers,
landlord, or tax man, arrive before the cash you’re owed is
collected. This is where cash flow management comes in. In
short, many business fail due to lack of cash, not lack of profits.
51% of UK small
business owners
cite cash flow as
their ‘biggest
challenge’.
- Experian
If your incomings are greater than your outgoings and
you have both a cash buffer for contingency, as well
as a clear and well-researched forecast with realistic
expectations for the coming year, then your business is
in a healthy cash flow position.
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5. Good Cash Flow
Management
What is Cash
Flow Management?
Why Cash Flow
has to be Managed?
The Advantages of
Good Cash Flow
Management
Data Helps Your
Cash Flow Position
What is Cash Flow
Management?
Cash flow management is a balancing
act between inflows and outflows. In
academic terms, the theory behind cash
flow management is to:
Speed up your cash inflows -
the flow of money into your business
Manage the timing of your cash outflows -
The money going out of your business
Minimize expenses -
The operational costs of running your business
With effectively managed cash flow, you can forecast your
available cash at any given point, and plan your business activities
in a way that ensures adequate cash for all your expenses, even
the ones that when accumulated, and not planned for, can make
or break your company.
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6. Inflow
Cash from sales
Cash from outstanding customer accounts
(accounts receivable)
Bank loans / alternative finance
Interest on investments
Shareholder investments
Buying goods for selling on
Buying materials for manufacture
Buying services
Staff costs
Operating costs e.g. rent, marketing,
product development
Buying fixed assets
Finance arrangements e.g. interest on loans
VAT and taxes
Outflow
Your cash inflows come from the sales of goods and services
to your customers. If you are extending credit to your
customers, then the cash inflow only occurs when you collect
on your accounts.
This yet-to-be-collected cash is known as ‘accounts receivable’.
The cash you collect is usually used to purchase more resources,
which then creates value through the production/acquisition
of more goods to sell to customers. Payments are again then
collected, and the money is used to invest in new resources
and expenses.
These inflows and outflows make up the cycle of cash flow.
To put it simply, cash coming into your business is not inevitable,
no matter how good your product or service may be. For you to
create and maintain a healthy flow of cash into your business, it
needs to be: tracked, monitored, chased, captured, converted,
protected, and controlled.
Cash flow is not a given, and as such must be managed skilfully
throughout the entire cycle. In lean or uncertain economic times,
businesses can feel the pinch on their cash from both sides -
from their customers’ inability to pay invoices due to financial
difficulties, as well as the general scarcity of cash from outside,
non-operational sources such as bank loans and finance.
Why Cash Flow Has to be
Managed?
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7. The Advantages of Good Cash
Flow Management
Effective cash flow management is not only for keeping the
business afloat in difficult times. It is also important in more
positive economic conditions. If businesses don’t keep a close
eye on working capital, this can cause serious problems for
businesses, including stifled competitiveness, and overtrading
beyond means.
There are many advantages of good cash flow management,
aside from keeping your business afloat and your staff paid.
Other benefits of good cash flow management include:
• Increased awareness - you can spot potential gaps in cash
flow and take action to reduce their impact, or plan ahead to
make investments knowing that other commitments are met
• Increased productivity - With less time devoted to managing
finances, more time can be devoted to business development
and other key activities
• Increased liquidity - helping you to keep agile enough to cope
with the fluctuations of running a day-to-day business
• Reduced debt - with more cash available, you’ll be able to
reduce those cash-sapping monthly commitments that have
high interest rates or late payment fees that can drain your
working capital
Data Helps Your Cash
Flow Position
Having accurate, comprehensive data is crucial to
understanding your cash flow position. Keeping record of
all of the following factors will help ensure that you have a
good handle on your inflows, outflows, balances, risks and
expenses. According to CIMA, important data points to have
understanding of are:
Customers’ credit status
Customers’ payment records
Outstanding receipts
Suppliers’ terms
Short term expenses / cash demands
Short term surpluses
Investment options
Current capacity for debt
Long term projections and forecasts
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8. Recognising Cash
Flow Problems
Causes of Cash
Flow Problems
Recognising a Cash
Flow Problem
Negative Cash Flow
vs Negative Cash
Balance
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Causes of Cash Flow Problems
The essential cash flow problem is of course negative flow, i.e.
there is more money going out of your business than coming in.
However, this can be caused by a number of factors.
The primary causes of cash flow problems for business include:
• Poor levels of profit (or losses)
• Over investment in fixed assets
• Too much or unbalanced stock inventory, tying up cash
• Being too generous with customer credit
• Overtrading beyond capacity
• Unexpected changes, both internal (staff, machinery) and
external (recession, new legislation)
• Fluctuations in seasonal demand
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9. Recognising a Cash Flow
Problem
Negative Cash Flow vs Negative
Cash Balance
“One in four SMEs said that if the
amount it was owed grew to £50,000,
it would be enough to send it into
bankruptcy.”
- BACS Payment Schemes study.
There are a few clear warning signs that signify a problem with
poor or negative cash flow:
• Showing decreased liquidity and running out of
working capital
• You are overtrading: selling more or faster than you can
cope with financially
• Excessive short-term debt
• Missing out on payables discounts or paying them
beyond terms
• Late or slow collection of outstanding receivables,
causing them to pile up
• Paying creditors beyond terms
You can also use an accounts receivable to sales ratio to
see if signs of a cash flow shortage are beginning to appear.
For example, an increase in your accounts receivable to sales
ratio from one month to the next indicates that your investment
in accounts receivable is growing more rapidly than sales.
This is often one of the first signs of a cash flow problem. If
you’re running a highly seasonal business, it’s important to
compare like for like, otherwise the comparison may provide
misleading information.
Negative cash flow occurs when more goes out than comes in.
A negative cash flow is the decline in your cash balance over a
period of time. Negative cash balance is something different
and is not a good sign at all. A negative cash balance occurs
when you’re unable to pay your bills. A negative cash flow when
not managed properly can cause your business to fail over
time, but a negative cash balance signifies the imminent end
of your business.
If you are experiencing negative cash flow, it is imperative
that you address it before you reach the point of negative
cash balance.
Accounts
Receivable / Sales
for the Month
Accounts
receivable
to sales ratio
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10. 8 Steps to Cash Flow Success
Get The Money Coming in1
2
3
4
5
6
7
8
9
Keep Solid Budgets and
Forecasts
Prioritise Your Own Debts
Deal With Late Payments
Optimise Your Supply Chain
Trim Costs, Create Value
Put Your Cash Surplus to Work
Explore Alternative
Finance Options

11. Get The Money Coming in
Step 1
Streamlining the cash flow into your business means developing
and maintaining a smooth and efficient cash conversion period
where you can collect cash quicker, enabling you to meet your
cash outflow obligations.
The elements of the cash conversion period you need to hone
are as follows:
Customer buying decision and ordering process
* Make sure that it’s easy to understand what it is you’re selling
and perfect your marketing and sales operations.
* Make it as easy as possible for the customer to purchase. Use
the internet for ecommerce and accept payments in as many
forms as possible.
* Consider the customers’ needs: international currencies and
languages, help them make that decision to buy and place
that order.
Credit decisioning
* A smart credit policy is crucial to ensuring your cash flow
doesn’t fall victim to a policy that is too strict or too generous.
* If you’re not in a position to have your customers pay upfront,
then be sure to credit check them. Start this process as early as
possible to speed up the time taken to secure a purchase.
* Make sure you check and agree to credit terms and conditions
in advance of allowing purchases. Extending credit to secure a
sale may look good on the P&L sheet, but that customer must
be creditworthy.
* Consider offering early payment discounts to your customers.
Order fulfilment, supply and shipping
* Make sure your production processes, resources, shipping
arrangements and inventory/service levels are capable of
meeting the terms and conditions for order fulfilment that apply
to you.
* Don’t let delays in your business processes cause a delay in
getting paid, whether that be for products or services.
* Check stock to sale ratios to gauge your inventory process
efficiency, or if you supply services, make sure you have the
bandwidth to deliver on time.
Correct Invoicing
Without an invoice, you won’t receive payment. Make your
invoice clear, and send it within 24 hours. You want to get into
your customer’s payment processes as soon as possible.
Include the following on your invoice:
• Customer details
• Description of goods or services sold
• Delivery date
• Payment terms
• Due date
• Invoice date
• Price and total payable
• Whom they should be paying
• Order number and authorisation code
• Your own details - contact, registration and VAT
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12. Collection - handling debts
*Be organised. As soon as the sale is made, you should begin
your collection process.
*Weigh up the benefit to your cash flow against the cost of losing
customers when establishing your collection period terms. 30
days is standard.
*Learn and understand each of your customers’ payment cycles,
and be sure that your invoices are approved and included in the
payment run for the month. Call ahead to ensure they have all
the information they need.
*In credit management there’s a saying that ‘he who shouts
loudest gets paid first’. Be polite but firm from the outset on
your payment and credit terms.
*Consider using a credit management system to reduce
the amount of time managing debtors and encouraging
faster payments.
Payment of funds
Avoid postal payments, including cheques. This can add several
days to your cash conversion period. Encourage electronic means
wherever possible.
Budgeting
Both budgeting and forecasting are extremely important to
maintaining healthy cash flow. Despite forecasting being seen by
many businesses as a more regularly updated medium, a budget
still provides a strong foundation upon which to work from. If
something goes awry, it can act as an anchor - things may change
along the way, but a budget helps you to keep sight of what was
decided in the first place.
While incorporating all elements of the business where
possible, try to keep your budget as simple as you can, and be
prepared to create two versions: one for when things go well,
and one for if things go badly. Don’t overestimate your income
for the sake of being optimistic.
If you struggle to create an annual budget, consider splitting it
into smaller periods, perhaps quarterly. This type of budget will
invariably be more accurate and will reflect the ongoing reality
of your situation. However, if your business is seasonal, you may
find that the detail afforded in an annual projection will help you
better understand the challenges that lie ahead.
“If you are making 1.5% profit
on sales, an uncollected debt
of £1,500 nullifies £100,000
worth of sales” - CIMA
Keep Solid Budgets and
Forecasts
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Step 2

13. Prioritise Your Own Debts
Forecasting
Whether it’s the ability to negotiate financing, or simply making
your plans more achievable, it’s important that you remain
committed as a business to keeping an effective and accurate
forecast. In basic terms, you should include the following in
your forecast:
Cash receipts
Cash payments
Excess or shortfall of receipts over payments
Opening bank balance
Closing bank balance
Be sure to have all the information to hand, and keep things
simple. Group costs and revenues together for ease of
calculation. Don’t forget your VAT obligations and make a note
of key payment dates.
When budgeting and forecasting, don’t become a victim of
‘overtrading’ - where you’re selling so much that you run out of
cash to buy the resources you need. The better your forecasting/
budgeting, the more time you will have to explore options and
take the appropriate steps.
Tempering your growth trajectory or borrowing money to bridge
a working capital gap is often an important part of a successful
financial strategy.
Your employees and your suppliers should come first. You, as
the boss, or shareholder should come last. Always make sure
you keep your suppliers happy. If you’re a good customer to your
own suppliers you may find the additional benefits they give you
to be a lifesaver in tough times.
Remember, better financial performance ultimately comes
from having and maintaining competitive advantage in the
marketplace, not from better financial management in and
of itself.
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Step 3

14. Late payments are considered to be the scourge of the small
business, with over 1 million SMEs experiencing slow or late
payments. Late payments can quickly turn into bad debt, which
can have disastrous consequences for SMEs. There are however,
a few pre-emptive steps that can be taken to minimise late
payments, (some of which have already been listed previously):
• Perform initial credit checks
• Make your payment and credit terms very clear to
prevent excuses
• Establish and maintain good payment habits by being on
the ball from the beginning
• Send out your invoice promptly and make it
100% accurate
• Keep a close monitor on payment due dates
• Chase invoices as soon as they become overdue
• Have a formalised escalation and collection process that
is made clear from the outset
• In some cases it is feasible to get 50% of even 100% of
payment upfront
Tohelpyoutodealwithlatepayers,usedatatohelpyourecognise
trends and highlight which of your customers are regularly late
or defaulting on their payments and by what amount. This will
help you prioritise your debt collection processes and also the
decision to cease doing business at all with some companies.
Consider moving consistent late payers onto a ‘cash only’ basis,
if that seems right.
Deal With Late Payments
“Collecting debts is a
competitive sport - If you’re
not getting paid then someone
else might be” - CIMA
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Step 4

15. “Most businesses can survive
several periods of making a
loss, but they can only run out
of cash once” - CIMA
Look beyond your own customers and look instead to your own
suppliers to ease cash flow issues. Don’t be shy about asking
existing suppliers for a discount to stay with them for another
year. This will help your cash outflow situation. Order regularly
and pay on time, then you’re a good customer to your suppliers
which can bring extended terms and early payment discounts.
This can positively help your cash flow situation.
Conversely, if you are a seasonal business, arranging a payment
plan with your suppliers that adjusts to your changing needs can
be beneficial and create clarity with everyone. If you can pay
within 15 days during the summer months, but need 60 days
credit out of season, discussing and arranging this with your
suppliers can help the whole supply chain.
Are there any areas of the business that are not creating value?
Always be aware of unnecessary costs, as money tied up in your
business through fixed assets means money that isn’t available
when you need it. Order regularly and pay on time. This makes
you a good customer to your suppliers, which can bring extended
terms and early payment discounts. Both of which help your cash
flow situation.
Optimise Your Supply Chain
Trim Costs, Create Value
Remember, healthy cash flow management is all about speeding
up money in, and slowing down money out. Without being a late
payer yourself, you want to be able to align your inflows and
outflows to maximise your own cash position.
Having the ability to bridge gaps in cash flow to maintain a
strong and stable supplier relationship is key. This is where
having the correct financing options in place can come into
its own.
Significant supplier discounts can be achieved through bulk
purchase, however, serious problems can occur when large
amounts of cash are tied up in surplus or unnecessarily large
amounts of stock. Explore efficient stock management
operations. Base decisions around improving efficiency. Strike
a balance between securing bulk discounts from suppliers,
and keeping your orders smaller which will avoid working
capital gaps.
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Step 5
Step 6

16. If you’re in the fortunate position of having a cash surplus, then
it’s a good idea to make hay while the sun shines. It also reflects
well on your business planning skills if you can extract maximum
value from your cash balance. Here are a few options open to you:
• Build up a strong profile with your creditors/
suppliers by paying them early
• Improve your balance sheet and reduce
interest payments by paying down your debt
• Use the cash wisely to invest in product
development, expansion, and to fund your
growth strategy
Whichever option you choose, it’s important to consider how it
will affect the future agility of your business, and provide the
most flexible yet stable basis for growth.
Put Your Cash Surplus
to Work
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Step 7
‘Business owners
regularly review their
surplus funds, six
out of 10 (62%) do so
at least once a year
which indicates that
businesses are thinking
about how their cash
could be working harder
for them.’ - Aldemore

17. Having a sound financial system in place to ensure you can
seize upon opportunities for growth, and close any gaps in your
working capital is crucial to cash flow success.
Having the right financing in place will
enable you to operate from a position
of stability and strength.
Fromtraditionalsourcesofincomesuchasoverdraftfacilitiesand
bank loans, to flexible short term finance and growth-enabling
revolving credit facilities, the increase in finance options now
available means that it’s easier than ever for SMEs to structure
their cash flow management cycles effectively. With simplicity
and flexibility at their core, alternative finance providers have
been endorsed by the UK Government as engines for growth
and financial stability.
Choosing the right alternative finance
provider has many benefits:
Speed -
cutting edge technology and automated credit scoring means
applications are processed quickly, providing working capital
exactly when it’s needed.
Simplicity -
Less paperwork, efficient processes and intelligent online
platforms mean more time for you to concentrate on your own
business.
Flexibility -
Providers, like Pay4, that provide payment for any invoice that
you owe, who don’t charge non-usage/early repayment fees,
allow SMEs to use the funding with
maximum flexibility.
Transparency and awareness -
Transparency around fees, terms and eligibility, means better
control of day-to-day running costs, and improved planning and
forecasting.
Improved fulfilment and capacity -
Having the cash flow available to meet increases in demand
means the chances of falling foul to overtrading are
significantly reduced.
Explore Alternative Finance
Options
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Step 8

18. As outlined above, the importance of effective cash flow
management cannot be overstated. It not only marks the
difference between success and failure, but also provides
numerous benefits for business that become even more
pertinent in times of economic downturn.
Successful cash flow management starts at the very beginning
of the journey that cash takes into your business, and cycles
through every part of your operations, informing forecasts,
budgets, and future strategies. If managed correctly, then it
truly is the lifeblood of a successful, profitable business, and
allows for continued investment and growth.
Ensuring your procedures and processes are aligned in such
a way that cash enters and leaves your business at optimum
speed is key to keeping a healthy cash balance.
Orders must be fulfilled efficiently, invoicing must be
accurate and clear, credit extended judiciously, debt collection
tightened, supply chains optimised, value creation maximised,
and the right finance options considered.
Having taken on board the points above, your business should
now be armed with the necessary information to help you
build a healthy cash balance that will stabilise your finances
and improve your chances of long term success.
Conclusion
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19. Pay4 is a flexible business finance solution, providing UK SMEs with working capital to settle supplier
invoices. Founded in 2013, Pay4 believes that every stable and growing business should have access to
business finance without constraints or delay. Success is knowing we have supported our customers
through tough times and through times of growth too.
Pay4 provides a revolving, unsecured credit facility. Credit limits, which start at £50,000, can be used,
repaid and reused as often as your cash flow cycle requires. Pay4 does not require security in the
form of personal guarantees or business assets. This makes it straightforward to get our customers
up and running quickly.
Because Pay4 is an unsecured credit facility, we work solely with UK companies with a track record of
growth and stability. We are not an appropriate business finance solution for all businesses but we
may well be a perfect fit for you if your company meets the following criteria:
Limited Company or PLC incorporated in the UK
Trading for 3+ years
Profitable with a capital base of £200k
Turnover of £1.5m+ per annum
Any industry sector with UK and/or international suppliers
0845 0180 760
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Gloucester
GL1 2FB
UNITED KINGDOM
info@pay4.co.uk
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