4 ways to manage your small business’s cash flow


If you have a profitable business, why would you need to spend time learning about cash flow management when the account always ends up in the black eventually?

Unfortunately, running a business is not quite that simple. Effective cash flow management ensures you always have the funds on hand to meet all your accounts payable, preventing you from getting into trouble. It’s a critical part of every small business owner’s job and the key to a company’s long-term financial success.

Defining cash flow

Cash flow tracks the money coming in and out of your business over a period of time. It’s not a measure of profit, but rather the actual money you brought in and the money you spent. It tracks accounts receivable and payable as the funds are transferred into and out of the business account, not when the invoice is sent or the transaction is confirmed. Cash flow is a real-time snapshot of cash assets and liabilities only.

Accounts payable refers to all of your outgoings, all of the bills your business has to pay. Is accounts payable an asset? No, accounts payable is actually a liability. Accounts receivable refers to all of your incoming funds and is an asset.

Cash flow can include assets that introduce a sudden influx of funds, such as a loan or investment. This means it’s possible to have positive cash flow without being profitable. Alternatively, it’s possible to be profitable with negative cash flow if you’re waiting on large accounts receivable transactions.

There are three main cash flow variations, each serving different purposes:

  • Operating cash flow: As described above, a snapshot of the current cash flow (money received minus money spent) at a given point in time.
  • Free cash flow: The cash a business has on hand to distribute among stakeholders or reinvest into the business.
  • Cash flow forecast: Projected cash flow for an upcoming period given expected accounts receivable and payable.

You can think of cash flow management as arranging accounts payable and receivable so that you always have funds to pay your expenses. 

Typically, businesses organize themselves around a monthly schedule. Each month, they pay their rent, utilities, credit card, loan repayments, payroll, etc. On top of these, other expenses occur annually, semi-annually, or quarterly, such as taxes and insurance payments.

A passive business owner might shut their eyes and hope for the best, assuming that as long as the money is coming in, they can pay all the expenses. Proactive cash flow management dives into the details to help ensure this is the case. 

So, what cash flow tactics can you make use of? Listed below are four cash flow management ideas for small businesses to consider.

1. Speeding up accounts receivable payments

Everyone wants to get paid as quickly as possible. B2C businesses paid via cash or cards don’t generally have an issue with slow accounts receivables. However, B2B (business-to-business) models can cause headaches when clients expect credit card payments and are slow to pay their invoices.

There are a number of processes you can implement to ensure you get paid as quickly as possible, though. 

The first is to invoice clients as quickly as possible. Providing accurate and prompt invoices will reduce any excuses on the client’s end. Also, the amount owed should be made clear throughout the process. Clients shouldn’t be surprised by the final figure on the invoice, scrambling to find funds themselves, or even challenging the invoice.

Secondly, you should offer multiple payment methods to help clients pay with their preferred option. Forcing clients to fit within your accounting processes can slow things down, affecting their accounts payable processes and making them work with payment methods they’re less familiar with.

Finally, you need clear and concise net terms that let clients know when payment is due (e.g., net 30, net 60, etc.). Consider introducing early payment incentives such as discounts and late payment penalties such as fees or interest.

2. Designing accounts payable processes to optimize cash flow

This is the part where we recommend doing precisely what you hope your clients don’t: waiting to pay your bills until you have to and maximizing the amount of cash you have on hand. You don’t want to incur any late fees or penalties, but the longer you hold onto funds before paying a bill the more flexibility you have in managing your cash flow.

Other accounts payable tips include:

  • Go through your expenses and remove any spending that isn’t adding value to your business or your customers.
  • Use electronic payments with shorter processing periods.
  • Spread bills throughout the month so you don’t get hit with several at the same time.
  • Build relationships with your vendors and lenders to try and negotiate more favorable payment terms.
  • Consider leasing your equipment to avoid large one-time outlays or having to borrow in order to buy.

3. Open lines of credit before you need them

With multiple lines of credit, you can easily solve short-term cash flow problems. However, for lines of credit to be useful, you need to have them in place before the cash flow occurs. Open lines of credit when business is running smoothly, and they become available to you. These will be a safety net to ensure you don’t miss any bills and end up paying more than you need to.

4. Use technology

You should be integrating multiple pieces of software to manage your accounts and payments effectively: 

  • With cloud-based accounting, you can easily manage incoming and outgoing transactions from anywhere with an internet connection.
  • With accounts payable and receivable software, you can quickly generate and send accurate invoices, input all of the relevant payment details from incoming invoices, create reminders for payments, utilize a range of payment methods, and effortlessly oversee all of your payments.

Protecting your business with proactive cash flow management

Perhaps the most important cash flow management tip is being proactive and constantly monitoring your upcoming bills and incoming payments. Beyond monitoring, spend time developing accurate sales predictions so you can forecast your future cash flow and always know what your balance will be. With proactive cash flow management, you are best placed to overcome unexpected bills.

Remember, profitability isn’t the be all and end all when it comes to company finances. Poor cash flow management can get even a profitable business into trouble.

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