5 Effective Strategies for Better Cash Flow for SMEs
A business can be profitable and still run out of cash. Here are five practical strategies that bring money in faster and give you a better overview of your cash flow.
Profit is not the same as cash
Many small and medium-sized businesses find that the accounts show a profit while the bank account is empty. The explanation is often that money is tied up in stock and unpaid invoices, while wages, rent and suppliers have to be paid now. Cash flow (the flow of money into and out of the business) is therefore just as important to manage as earnings.
Here are five strategies that work for most SMEs.
1. Invoice faster, and correctly
The sooner you invoice, the sooner you can be paid. Send the invoice on the same day the goods are delivered or the job is finished, and for longer jobs invoice in stages or on account as the work progresses.
At the same time, make sure the invoice is correct. An invoice with the wrong amount, a missing order number or the wrong recipient is often put aside by the customer. If you sell to the Danish public sector, the invoice must be sent electronically via NemHandel: otherwise payment may be postponed.
Expert tip: Always state a specific due date
A specific due date on the invoice means that late-payment interest under the Danish Interest Act runs from that day. Without a due date, interest only runs 30 days after you have requested payment (section 3 of the Interest Act).
2. Tighten your payment terms
Payment terms are one of your strongest levers. Consider:
- Shorter payment terms, for example 14 days instead of 30. Between businesses, payment terms of more than 30 days require your express acceptance (section 3 a of the Interest Act).
- Prepayment or a deposit for new customers or large orders.
- Stage payments linked to milestones instead of one large final invoice.
- Easy ways to pay, for example a payment link or automatic payment.
3. Control your credit
Every time you deliver on credit, you are in effect lending money. Credit check new business customers, at a minimum with a check of the CVR register (Denmark's company register) and their latest annual report, and set a credit limit. High-risk customers can be given shorter terms or asked to pay in advance.
4. Follow up systematically on overdue invoices
Late payments rarely get better with time. A fixed procedure makes sure no invoice is forgotten:
- A friendly reminder a few days after the due date
- Reminders with a fee of at most DKK 100, no more than 3 reminders and at least 10 days apart (section 9 b of the Interest Act)
- A debt collection notice with a deadline of at least 10 days before debt collection (section 10 of the Debt Collection Act)
If the customer is a business, you can also claim fixed compensation of DKK 310 for late payment (section 9 a of the Interest Act).
Expert tip: Review your debtor list every week
Set a fixed time each week to go through overdue invoices. Call the largest arrears. A short conversation often reveals whether there is a practical problem, a disagreement, or an emerging payment problem you need to react to.
5. Make a cash-flow budget
A cash-flow budget shows when money is expected to come in and when it has to go out. It does not need to be complicated: a spreadsheet covering the next 3–6 months is a good starting point:
- Expected payments from customers (realistic, not optimistic)
- Fixed costs: wages, rent, leasing, subscriptions
- Variable costs: purchases, subcontractors
- VAT and tax on the right dates
Update the budget regularly and compare it with the actual figures. That way you can see a cash problem coming while there is still time to act, for example by talking to the bank, postponing an investment or stepping up efforts towards debtors.
When a customer does not pay at all
Even with good routines, some customers will not pay. Then it is about acting quickly: the older a claim gets, the harder it typically is to recover. Also consider financing solutions such as factoring if you need to free up cash tied up in invoices.
Getting started
Start with what has the quickest effect: invoice on the same day, state a specific due date, and introduce a fixed weekly review of debtors. If you have claims that are not being paid, you can use InkassoHurtig to get no-obligation quotes from police-authorised debt collection agencies and lawyers. This content is general information and not legal advice.