How to improve cash flow in a small business: find the biggest fix in Xero

Short answer: cash flow improves in four ways, and they are worth very different amounts. Get paid sooner (shorter terms, deposits, reminders, online payment), pay suppliers on their terms, not earlier, hold less stock or work in progress, and earn more on each sale (prices and costs). The first three free a one-off lump of cash that is tied up today; the fourth adds cash every month. Most lists of tips treat them as equal. They are not: in many small businesses, taking two weeks off how long customers take to pay frees more cash than a year of cost cutting. Xero’s Aged Receivables, Aged Payables and Balance Sheet reports give you the figures to see which fix is biggest for you, in about 20 minutes.

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Why profit and cash flow are different problems

If the business makes a profit but the bank balance keeps falling, the cash is usually tied up somewhere: in invoices not yet paid, in stock on the shelf, in bills paid early, in loan repayments or in drawings. That is a cash flow problem (the warning signs and the eight usual causes), and it is fixed by the first three levers below. Profit but no cash? shows how to find where it went.

If the business is not making a profit, faster collection only delays the problem. Start with prices and costs instead: why did my profit drop? and where is my money going?.

Work out what each fix is worth

You need four figures from Xero. Use amounts without GST or VAT throughout so they compare like with like.

1. Annual sales. Profit and Loss for the last 12 complete months, total income.
2. What customers owe you. Aged Receivables Summary as at today, total. Only trust it if payments are matched to invoices; see who owes me money?.
3. What you owe suppliers. Aged Payables Summary as at today, total. To compare it with your purchases, take the 12-month total of the costs you buy on account (materials, cost of sales, subcontractors).
4. Stock. If you hold stock, the inventory line on the Balance Sheet, and the 12-month cost of sales from the Profit and Loss.

Then turn each into days:

Measure	Formula	What it tells you
Debtor days	owed to you ÷ annual sales × 365	How long customers take to pay, on average
Creditor days	owed to suppliers ÷ annual purchases × 365	How long you take to pay suppliers
Stock days	stock ÷ annual cost of sales × 365	How long stock sits before it is sold

Each day you take off debtor days or stock days, or add to creditor days, frees one day of sales (or purchases) in cash, once. The free debtor days calculator does the first one for you and shows how much is tied up beyond your terms; how to calculate creditor days covers the second, including why the GST in Aged Payables has to come out first; how to calculate stock days covers the third, including when the stock figure in Xero is out of date, and the stock turnover calculator shows the cash a target turnover would free. The cash conversion cycle calculator puts all three together and shows which one frees the most cash per 10 days.

Debtor days are an average and Xero’s report includes invoices raised yesterday, so a business with 30-day terms will rarely sit below about 35. A figure well above your terms is the signal.

A worked example: an electrical contractor

An electrical contracting business has $1,200,000 of sales a year, buys $480,000 of materials, and offers customers 30-day terms. The bank balance is always tight, even though the business is profitable. The owner pulls the figures from Xero:

From Xero	Amount	Days
Owed by customers (Aged Receivables)	$171,000	52 debtor days
Owed to suppliers (Aged Payables)	$18,400	14 creditor days, on 30-day supplier terms
Materials in stock (Balance Sheet)	$40,000	30 stock days

One day of sales is $1,200,000 ÷ 365 = $3,288. One day of materials is $480,000 ÷ 365 = $1,315. So each fix is worth:

Fix	Change	Cash freed, once
Get paid sooner: reminders, deposits on large jobs, card and direct debit on invoices	52 to 38 debtor days (14 days × $3,288)	$46,000
Pay suppliers on their 30-day terms instead of within 14 days	14 to 30 creditor days (16 days × $1,315)	$21,000
Order materials per job and return unused stock	30 to 20 stock days ($40,000 to about $26,300)	$13,700
Total		$80,700

And the lever that adds cash every month: a 3% price rise on $1,200,000 of sales is $36,000 a year, $3,000 a month, if customers stay. The free price increase calculator shows how many customers you could lose before a rise stops paying.

The ranking is the point. The owner had planned to spend the month cancelling subscriptions worth about $300 a month. Collecting faster was worth more than ten years of that, and paying suppliers on their actual terms cost nothing at all. Debtors came first: 38 days is still eight days slower than the 30-day terms.

The fixes, and how to do each one in Xero

Get paid sooner (usually the biggest)

• Invoice on the day the work is done, not at month end. Each week of delay adds a week to debtor days.
• Turn on invoice reminders so overdue customers hear from you without you writing each email; see Xero invoice reminders.
• Add online payment to invoices (Xero connects to card and direct debit services such as Stripe and GoCardless, depending on your region). Customers pay sooner when paying is one click.
• Ask for deposits or progress payments on large or long jobs, so you are not funding the materials and wages for weeks.
• Shorten terms for new customers, and check that the terms on your invoices match what you agreed. Xero sets default due dates per contact and in invoice settings. Invoice payment terms: 7, 14 or 30 days? shows which to choose and why early payment discounts cost more than they look.
• Chase the biggest and oldest first. Who owes me money? and Xero aged debtors and creditors reports show who to call.

Pay suppliers on their terms

• Enter bills with the supplier’s real due date and pay them in a weekly or fortnightly run (batch payments), on the due date, not when the bill arrives. Never pay late without agreeing it: a supplier who stops giving credit costs more than the days gained.
• Ask your largest suppliers for longer terms once you have a record of paying on time.

Hold less stock or work in progress

• Order for confirmed jobs rather than for the shelf, and return or sell slow lines. For service businesses the equivalent is unbilled work: bill milestones as they are reached.

Keep tax money apart and plan the big payments

• GST or VAT, payroll taxes and income tax are not extra cash; they are due later. Moving them to a separate account each month stops a quarterly return from becoming a crisis. Managing cash flow is a 15-minute weekly routine that finds the low week before it arrives, Xero short-term cash flow shows what is due in the next 30 days, a 13-week cash flow forecast shows the whole quarter week by week, a 12-month cash flow forecast example shows how a seasonal business plans for its tax bills and quiet months, and how many months of cash should a business have? shows how much to keep in reserve.

Borrow last, and only for a dated gap

• An overdraft drawn only when needed is usually the cheapest backup. Short-term unsecured loans priced with a factor rate cost far more than they sound, and their weekly repayments start straight away; cash flow loans for small business works through the real cost and the cheaper fixes to try first.

Earn more on each sale

• Prices, margin and costs add cash every month rather than once. Check gross profit margin for slipping margins and where is my money going? for the largest costs.

Common questions

What is the quickest way to improve cash flow? Usually collecting what customers already owe you. Run the Aged Receivables report, call the largest overdue amounts first, and turn on invoice reminders and online payment so the next invoices are paid sooner. It frees cash within weeks, without changing prices or cutting anything.

Does cutting costs improve cash flow? Yes, but slowly: a saving of $500 a month frees $6,000 over a year. Getting paid a week sooner frees a week of sales at once, which is more for most businesses. Cut costs too, but work out what each fix is worth before choosing where to spend your time.

Is paying suppliers later a good idea? Paying on the due date rather than early is. Paying after the due date without agreeing it damages the relationship and can cost you credit or discounts. If a supplier offers a discount for paying early, compare it with what the cash is worth to you first.

How do I see my cash flow in Xero? The Bank Summary and Statement of Cash Flows show where cash went in a past period, and short-term cash flow shows the next 30 days from invoices and bills already entered. See how to run and read the Xero Statement of Cash Flows.

Why do I have cash flow problems if I am profitable? Because profit counts sales when invoiced and costs when billed, while cash only moves when money is paid. Unpaid invoices, stock, loan repayments, drawings and tax payments all use cash without showing as costs. Profit but no cash? walks through finding which one it is.

Seeing your cash flow every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday. It shows the bank balance against last month end, who owes you and how much is overdue, and bills due soon, and when cash has fallen in two of the last three months it says how long the cash lasts at the recent pace. You see a fix working, or a problem starting, within a week. It asks Xero for read-only access, and there is a 14-day free trial with no card.