10 Cash Flow Management Strategies for Small Businesses

Cash flow management is essential to any small business, yet many entrepreneurs struggle. Money flows in and out constantly, making it hard to stay on top of finances; but prioritizing effective cash flow management should always be top of mind.

In this blog post, I’ll summarize an informative article outlining 10 effective cash flow management strategies small business owners can utilize.

What is cash flow? 

Cash flow refers to all the payments made into or out of a business account. It is simply the movement of 

money (cash or virtual) in and out of an account, which may be for a business, a project, or personal use. 

For a business, cash flow is the amount of cash and cash equivalents (CCE), such as securities, 

treasuries and market funds that a business generates or spends over a given period of time. This means it encompasses the cash flow in a business in current times and spans the past to the future.

The primary examples of 

cash inflows include cash sales, customer payments, interest on savings, bank loans, and shareholder investments. Cash outflows are in the form of raw material purchases, salary payments, rent expenses, taxes, and more.

What is cash flow management?

Cash flow management is the process of analyzing, monitoring, and optimizing the inflow and outflow of money from your business. It aims to accurately forecast your business’s cash flow needs by tracking and controlling your cash inflows and outflows.

Is cash flow and profit the same?

No. Cash flow differs totally from profit. As a business owner, you must have a solid understanding of both and identify the differences. As explained already, cash flow is the money that moves in and out of your business. On the other hand, profit refers to the money that remains after deducting your expenses and taxes from your overall revenue.

While your profit will show you the success of your business per transaction (as in how much you’ve gained), cash flow is a more reliable means of determining the long-term outlook of your company’s finances. Thus, the key difference between the two is time.

What is a cash flow statement? 

A cash flow statement (CFS) is a financial statement that sums up the movement of cash and cash equivalents that come in and out of a company. The CFS captures how a business generates income and how well it manages the cash to fund its operations, pay its debt, and settle other expenses. The cash flow statement also complements the balance sheet and the income statement. 

Importance of cash flow statement

The CFS has many importance, but chiefly among them is that; 

• A cash flow statement is a reliable measure of the profitability, strength, and long-term sustainability of a business for the owner. It can determine whether the business has enough liquidity or cash to pay its expenses and predict future cash flow, which aids budgeting. 
• CFS helps investors assess a business’s financial health before committing to it. However, a negative cash flow might be a temporary issue resulting from a growth strategy.  

Essentially, the more cash available for business operations, the better. 

As such, it is important to be able to manage the flow of cash into a business. 

Read:  How to Prepare a Cash Flow Statement

What, then, is cash flow management? 

Cash flow management means monitoring the money coming into your business against outgoings such as bills, salaries, and property costs. Cash flow management also helps you monitor the flow of funds and manage the cash flow toward sustaining your business. It gives you a comprehensive view of cost versus revenue. It ensures you have enough funds to run your business and pay bills while making a profit. 

Every company, irrespective of size, needs to have some level of cash flow management because it is a crucial business need for financial security. And it is even more important for a small business that seeks success. 

Read: 10 Supply Chain Security Best Practices that can Help in Risk Management

It is important for you to take note of the flow of resources in your small business, especially if you have numerous inbound and outbound transactions per day. Effective cash flow management will help you keep track of your revenue and expenditure, and this record will provide insight into vital business decisions you want to make. It also ensures a steady flow of funds to meet business expenses, service financial obligations, capitalize on opportunities, and easily navigate unforeseen challenges.

Cash Flow Management Strategies for Small Businesses

Here are ten strategies that you can use in effectively managing your cash flow as a small business: 

1. Evaluate your cash flow: To properly manage the cash flow for your small business, you need to estimate your revenues and expenses by tracking and comparing figures. It is important that you understand where and how your money comes from and what you spend on. This will give you a clear picture of the status of your business. So, take a regular analysis of your cash flow. 
2. Create a cash flow statement: Follow up by plugging the forecasts into your cash flow statement. At this stage, you can also categorize cash flow into operating, investing, and financing activities for a holistic view. This is essential for tracking working capital needs where the highest requirement for streamlining lies due to a potential mismatch between inventory, receivables, and payables.
3. Forecast your cash flow: since you already know the state of your business, you can now make projections about how much cash to expect to move in and out of your business. These forecasts can be estimated from historical data, financial reports, and sales projections. The forecast should be done in just four to six weeks because the longer the duration, the more likely to get inaccurate forecasts.
4. Implement corrective strategies: The next step is to get up. Processes that will correct all issues present in the current flow of cash. This could include renegotiating payment plans, accelerating cash collection, reducing expenses, etc. 
5. Make payment easier for your customers: Your target should be to have more cash inflow in your business, which will be difficult with rigid or obsolete means of payment. Find a new, better, and easier means for your customers to pay you. This way, you are guaranteed to get your money on time.
6. Keep an invoice: You must keep a record of all business transactions you make. Whether it’s info or an outflow of funds, write and keep invoices. This record will clear mistakes and assumptions that may arise in the future and help you curate an accurate cash flow statement. 
7. Lease your equipment: As a small business, purchasing heavy machinery is not smart as it is often not cost-efficient. Yes, you need it, but renting this equipment will be much cheaper to rent these equipment, especially those you don’t use regularly. 
8. Communicate with your suppliers and customers: As a small business, you might need to review certain agreements concerning payment or reschedule delivery dates. However, after a careful analysis of your cash flow and a diligent forecast, you should know how to adjust your schedules and payment plans with your suppliers and customers. This strategy will help you move past some obstructions. 
9. Keep a reserve for emergencies: you should never exhaust your capital, no matter how juicy an investment is. It is important that you keep some cash back just in case there is an emergency that needs your urgent attention. Always have money in reserve. 
10. Hire a professional: All these steps may seem impossible, especially for small business owners with no business management background. You can get an accountant to analyze and audit your business, provide a financial report, and advise you on the most suitable steps to take to grow and upscale your business.

Read more on: 12 Ways To Measure Small Business Success