Managing Cash Flow


Managing cash flow for small business is extremely important for increasing your chances of financial success. Even if your business is profitable, you can still end up with negative cash flow if the amount of money going out of your business is more than the amount coming in.


If you’re not properly managing cash flow, you could miss out on big opportunities for growth. You may not be able to pay your bills on time, afford expenses that are crucial to your operations, or have the extra money to make investments.


With that being said, many small business owners are unaware of what it takes to manage their cash flow. Approximately 30% of businesses will fail within the first two years. Improper financial management is often one of the major factors that contribute to business failure.

Below, we’ll discuss the definition of cash flow, tips for creating effective cash flow, and why financial management is so important for businesses.



What Is Cash Flow?


Cash flow is the amount of money that goes in and out of your business during a specific time period. You can choose to measure cash flow during weekly, monthly, or quarterly periods. You can also choose another time period that works for your situation, as long as it occurs regularly.


Businesses can have positive cash flow or negative cash flow. Positive cash flow occurs when the money coming into a business is more than the money going out of the business. Conversely, negative cash flow occurs when the money going out of the business is more than the money coming into the business.


Neither revenue nor profit can give a full view of a business’s cash flow. Revenue and profit can tell you some of the money coming into a business, while cash flow will consider all of the factors that increase and decrease a business’s cash balance.

For example, cash flow may include accounts such as:

  • Accounts receivable

  • Accounts payable

  • Inventory

  • Loans

  • And more

Cash flow statements are one of the top three most important financial reports for your business. Your cash flow statement should break down your cash flow into three different categories: operating cash flow, investing cash flow, and financing cash flow.


While you may be able to create a cash flow statement yourself, most small business owners like to take advantage of accounting software or an accountant who can create them professionally.


On a daily basis, your operating cash flow will provide a basic idea of how much cash you have to cover your expenses. It is calculated by deducting your operating expenses from your total revenue. However, operating cash flow won’t give you the details of where your money is going or coming from. Therefore, it’s important to look at every aspect of your cash flow.


Managing the cash flow of your business is important in ensuring that your business has enough money to keep operations running smoothly. If you manage your cash flow properly, you will better understand how to grow your cash balances and your business’s spending.



8 Tips for Effective Cash Flow Management


Below are eight tips that small businesses and solopreneurs can use to improve their cash management.


Keep Track of Your Monthly Cash Inflows and Cash Outflows


The first step to cash flow analysis is to begin tracking your monthly cash inflows and cash outflows. As we mentioned earlier, you can choose a different time period, but monthly periods are typical for many small businesses that have simple finances.


When you’re trying to measure your progress with any goal, you first need to understand your current situation or habits. Therefore, if you want to begin improving your cash flow, you will need to begin tracking your cash transactions.


You can use your transactions to begin establishing a bookkeeping system and build a cash flow statement.


Another important aspect of your cash inflows and outflows is to properly track your inventory. It’s a careful balance between having too much inventory that is tying up cash and not having enough inventory that results in not having product to sell.


If you have too much inventory, or you need some quick cash, you can consider having a sale, which can liquidate some of your surplus stock. However, make sure you understand the factors that can affect inventory, such as your business’s growth, marketing, and the time of the year.


Set Strict Guidance for Payment Terms


Set payment terms that ensure your business is receiving payments in a timely manner.

First, you may be able to collect deposits for expensive products or long-term projects. For example, freelance business owners may collect half of a project’s price when work begins and the second half upon completion. This can help provide the cash flow necessary for materials or labor as the costs are incurred instead of after they’ve already been paid for.


You can also speed up the payment process by making sure that you send invoices as soon as possible. Using apps or software to send invoices electronically can significantly speed up the process. Your invoices should also be designed to highlight important payment information, such as:

  • The payment amount

  • Due date

  • How to make the payment

You may also be able to match your accounts payable with your accounts receivable by timing your invoices so that due dates align with when your bills are due. Therefore, you won’t end up missing payments because you’re not receiving money on time.


In addition, you can provide discounts to customers who make payments quickly.


If you provide customer credit, consider setting policies and requirements that prioritize your business’s cash flow needs. One of the most important steps when offering customer credit is to do a credit check to learn about a potential customer’s financial history.


You should also have a policy in place for late payments. For example, if you identify a customer who regularly misses payment due dates, you may consider requiring cash payments in the future.


In general, your policies should make it quicker and easier for your customers to make payments and your business to receive cash.


Consider Opening Up a Business Line of Credit


A business line of credit works similarly to a credit card. You can use the funds to make purchases, and as you pay down the balance, the funds become available to use again. A business line of credit can act as a cushion when you need help with your cash flow. You can use credit for:

  • Paying daily expenses if you are struggling with receivables

  • Covering unexpected business expenses

  • Helping your business grow

Most business lines of credit are unsecured, which means you won’t need to put up any collateral. You may be able to receive a line of credit between $10,000 and $100,000 with a variable interest rate. However, these will be affected by factors such as your credit history and business performance.


Each lender will have different requirements to qualify for a business line of credit. For example, many will require that the business be under the same ownership for a certain amount of time. Others may have specific credit requirements.


You may also be able to use credit cards for similar purchases. Credit cards can be especially beneficial if you can find one that offers rewards programs to get cash back or use toward travel or other purchases.


Both business lines of credit and business credit cards can help your business build a credit history. If you can successfully pay off your bill as needed, you may eventually qualify for other types of business financing.


At the very least, creating a positive payment history may cause your lender to increase your credit limits, which can then further help your cash flow.


Prioritize Daily Business Costs


If you don’t prioritize your bills and expenses, you may end up overspending. You should create a strategy for the timing of your payments to ensure you’re not paying too many bills at one time. For example, you may choose to pay important bills, such as rent and utilities first, and then move other payments throughout the rest of the month according to importance.


You should also reevaluate whether your daily business expenses are worth what you’re paying. If you’re not using a subscription or service that you’re currently paying for, consider canceling. In some cases, you may also be able to renegotiate bills and payments.


Reducing overhead costs, such as cost of goods sold or cost of services, can be done in several different ways, including:

  • Finding less expensive suppliers

  • Buying only the essentials

  • Buying in bulk or looking for other discounts

  • Joining a buying cooperative

Finally, you may be able to receive discounts for making some payments early. If you are able to prioritize these payments to take advantage of the discounts, consider doing so.


Look Into Creating a Cash Flow Forecast


Cash flow forecasting is an estimate of your future cash flow, including income and expenses. It can give you an idea of whether you need to find ways to increase your cash inflows or if you’ll have the funds to grow your business.


Many businesses forecast monthly, but you can choose a period that works best for your business. You should first try to estimate your sales. You can use your previous year’s statements to look for trends. However, your sales may be affected by many different factors, such as payment terms, the economy, or your competitors.


You should also estimate other cash inflows such as:

  • Accounts receivable

  • Sales of assets

  • Tax refunds

  • Grants

  • Investments

  • Any other source of income

Lastly, estimate your cash outflows, such as:

  • Costs of goods sold

  • Administration or operational expenses

  • Purchasing new assets

  • Bank fees

  • Debt repayments

  • Paying owners

  • Investing

Compile all of these estimates as you would a typical cash flow statement. After the period, go back and compare your actual cash flow to your estimates. This will give you an idea of how to prepare better cash flow forecasts for the future.


Consider Financing Options for More Expensive Equipment Purchases or Business Needs


If your business needs to make larger businesses, you may consider financing options, such as leasing or loans. Financing makes it possible to avoid spending large amounts of cash at one time.

While leasing may cost more in the long-run, it can have benefits for your short-term cash flow. You won’t have to pay the full equipment cost upfront, and many leases don’t require a down payment. You may also be able to create a more flexible repayment plan.


In addition, a lease may help you stay up-to-date with equipment technology or features. For example, you may lease new equipment for a year, but when the lease expires, you can upgrade to the newest technology. However, if you purchase that equipment, you would be less likely to pay the full price of upgrading the equipment just a year later.


When considering loans, your options will depend on factors such as what you need the loan for, your business’s credit history, and more. Some loan options may include:

  • Bank loans

  • SBA loans

  • Online loans

Banks may be able to provide term loans, equipment loans, real estate loans, and more. However, they may be harder to qualify for, so having an established business with good personal credit may be necessary.


There are a variety of SBA loans that can be used for different purposes. They may be easier to qualify for, but you will still need a good credit history, good business revenue, and at least two years in business.


Online loans may be a good option for businesses with less-than-favorable credit or those who need fast funds. However, interest rates for online loans are likely to be higher than traditional loans.

You will need to determine whether the long-term costs of leasing or loans are worth paying to free up cash in the short term.


Use Accounting Software To Keep Up With Accounts Receivable


Accounting software is an excellent way to keep track of your cash flow and just about any other aspect of your business finances. However, if you only ever track one thing (which is not recommended), accounts receivable would be a high priority.


If you don’t keep track of your accounts receivable, you won’t be aware of who needs to pay you, when you’re supposed to receive money, or how much you are still owed. Accounting software can make it easier to monitor this information and store it in one spot.


Accounting software also has many other benefits, including:

  • Saving time by automatically entering transactions from your financial accounts

  • Accessing financial reports at any time, and filtering or customizing them

  • Keeping all of your financial information in one spot

  • Keeping your data accurate by automatically making changes across all reports as needed

  • Financial reports appearing professional for external purposes, such as lenders or government institutions

  • Payroll capabilities that can automate payments, calculate taxes, and more

  • Making it easier to track inventory, such as stock levels, cost of goods sold, prices, and more

With that being said, choosing the right accounting software for your business may be overwhelming. When comparing your options, keep in mind the cost of the program, features, and accessibility.


Decide whether you want to be conservative with your accounting budget or whether you would be comfortable spending more for a program with more features or greater accessibility. Many programs have different plans that will include different features. For example, you may have to pay more for a program that provides payroll services or project management tools.


Make sure you choose a program that includes the features you need for your business. In addition, check how you’re able to access your financial data. Some programs are cloud-based, while others are desktop applications that you can only access on one computer. In addition, some software will limit the number of people who can access the account.


Overall, accounting software is great for small businesses that need a convenient way to compile their financial information and manage their cash flow. However, if accounting software doesn’t seem right for you, you may also look into hiring an accountant or CFO services.


Delay Payments to Vendors if You’re Able


When you’re figuring out the timing of your payments, consider delaying your payments as long as you can without going past due dates. Unless there is a reason to pay the bill early (such as a discount), then keep the cash in your accounts as long as possible.


Studies have shown that many larger companies may make late payments to smaller suppliers without facing penalties. However, most small businesses should make sure they are paying their bills on time to create strong relationships with vendors and suppliers.


Supplier relationship management (SRM) may also help create a competitive advantage and make your systems more efficient. If you’re able to successfully manage your supplier relationships, there are also other ways you may be able to reduce costs.


For example, you may be able to negotiate contract lengths, future cost increases, delivery costs, discounts, and more, whereas a new supplier or one with whom you have a weak relationship may not be willing to discuss these points.


Why Is Financial Management Important for Businesses?


Financial management is essential to increasing your chances for business success. A business owner and other members of the company should be aware of how their actions affect the business’s finances.


Managing your business’s finances can have many different benefits. In your business’s startup phase, you may experience negative cash flow. Therefore, managing your finances can help keep your losses to a minimum and plan for when you need cash to make payments or purchases. It’s also helpful to understand how much cash an owner will need to invest until a business becomes profitable.


As your business begins to grow, financial management can help you budget for the cash you will need for expansion. You will have the time necessary to plan for internal investments or the financing process to gain the funds you need. You will also have a better understanding of how much debt you can take on without creating an imbalance in your finances.


Every day is a cycle of cash flow for a business. Your business buys the materials to make products, sells the products, pays bills, and continues to repeat the process. If you don’t understand how much this will bring in or out of your business, you may not be able to sustain your cash flow cycle.


In addition, managing your finances on a regular basis makes it easier to compile reports when they are needed. If a business manager, shareholders, or government entity needs quick access to financial reports, they will have already been put together.


Finally, if you properly manage your finances, it will give you a good idea of how much you will need to pay for taxes. You will have the ability to save over time instead of making one large payment when the taxes are due.


In general, proper financial management is helpful for keeping your business profitable. It helps you identify potential hurdles and plan for future expenses that may have otherwise caused negative cash flow or maybe worse. It’s important that your business have a financial management system in place to prevent your business from struggling.


Don’t Put Yourself in a Cash Flow Crunch


If you’re currently managing your cash flow properly, you should have an idea of what your current cash balance is and what your cash flow situation might look like in the next six months. However, if you don’t know what your cash flow looks like, you need to begin gathering financial data.


You should be updating your finances regularly, making sure your cash flow statement and other financial reports are accurate, and forecasting your finances to help you budget.


If you’re a freelancer, solopreneur, or small business owner who needs help creating and implementing a financial management system that can help you reach your goals, consider Noumena’s CFO Grow program. When you invest in CFO Grow, you’ll have access to a Chief Financial Officer who will mentor you in creating systems that can help increase your revenue.