Revision and practice on the methods businesses use to improve their cash flow and liquidity position.
Key vocabulary: Debt Factoring, Working Capital, Credit Checks
Key Concepts
Methods of Improving Cash Flow
Cash flow improvement strategies generally fall into four broad categories:
Accelerate cash inflows: encourage early payment by offering discounts (e.g. 2% off for payment within 10 days), invoice promptly, and chase late payers.
Delay cash outflows: negotiate longer payment terms with suppliers (e.g. extending from 30 to 60 days), delay purchasing stock until it's needed, and time tax payments strategically.
Improve working capital: reduce inventory levels (since stock ties up cash), sell unused assets, or rent equipment instead of buying it to preserve cash.
Raise external finance: arrange an overdraft facility or short-term loan to cover cash gaps, particularly useful for seasonal businesses with uneven cash flow.
Specific Cash Flow Improvement Techniques
Each of the techniques below has its own trade-offs:
Debt factoring: a business sells its outstanding invoices to a factoring company for immediate cash — typically receiving a large majority of the invoice value (e.g. around 90%) upfront, with the remainder paid once the customer settles the invoice, minus a fee. It gives quick access to funds, but the business receives less than the full invoice value overall.
Shortening payment time: asking customers to pay more quickly, e.g. reducing terms from 60 days to 30. This speeds up cash inflow but may deter some customers.
Early payment incentives: offering a discount (e.g. 2% off if paid within 10 days) to encourage faster payment. Improves cash flow, but reduces the total revenue received.
Credit checks: checking a customer's creditworthiness before offering them credit terms. Reduces the risk of late or non-payment, but can slow down the sales process.
Real-World Case Studies
Kriya — how debt factoring works at scale in the UK
UK fintech Kriya, which became part of Allica Bank in 2025, is one of the country's larger invoice finance providers, having advanced over £4 billion in credit to businesses. Its model reflects exactly how debt factoring works in practice: it can advance up to 90% of an outstanding invoice's value almost immediately, rather than a business having to wait the usual 30, 60 or even 90 days for a customer to pay. This kind of facility is particularly used by businesses with a mismatch between when they have to pay their own costs (e.g. materials, weekly wages) and when their own invoices are settled.
Source: verified via search, September 2026 — coverage of Kriya's invoice finance business following its 2025 integration into Allica Bank.
Overdrafts — still a common but risky way UK businesses manage cash gaps
According to the British Business Bank, around 16% of smaller UK businesses were using an overdraft facility as of Q3 2025, with total outstanding overdraft balances across UK SMEs at roughly £7.95 billion. Overdrafts remain popular because they're flexible and quick to arrange, but they carry a structural risk covered in this unit's concepts: a bank can reduce or remove an overdraft facility at short notice — which tends to happen exactly when economic conditions get harder, the moment a business is most likely to need it.
Source: verified via search, September 2026 — British Business Bank data on UK SME overdraft usage, Q3 2025.
Matching Activity
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Quick Knowledge Check
Short, snappy recall questions — tap to reveal the answer.
What is debt factoring? (1 mark)
Selling outstanding invoices to a third party for immediate cash, minus a fee.
State one way to accelerate cash inflows. (1 mark)
Any one of: offer early payment discounts, invoice promptly, chase late payers.
State one way to delay cash outflows. (1 mark)
Any one of: negotiate longer supplier payment terms, delay stock purchases.
Key Term Flashcards
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Debt factoring
Selling outstanding invoices to a third party for immediate cash, in exchange for a fee.
Working capital
The money available for day-to-day operations, calculated as current assets minus current liabilities.
Credit check
Assessing a customer's creditworthiness before offering them credit terms, to reduce the risk of late or non-payment.
A*/A Stretch
Examiner's eye
When recommending a cash flow improvement method, always weigh the speed of the fix against its cost to the business (e.g. debt factoring is fast but reduces total revenue received) — examiners reward answers that show this kind of trade-off rather than simply listing a method as "good."
Synoptic link
Connecting to sources of finance (L2, this unit): Debt factoring is itself a source of finance (a form of external finance based on receivables), which links this lesson directly back to the wider list of sources of finance covered earlier in the unit.
Try This With AI
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Describe a fictional business with a specific cash flow problem (e.g. slow-paying customers, high stock levels, or a seasonal sales pattern). Ask me to recommend the most suitable cash flow improvement method and explain one drawback of my recommendation. Then tell me whether my answer considered the trade-offs properly.