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Important Cash Flow Management Tips for Small Businesses

March 14, 2022

Important Cash Flow Management Tips for Small Businesses

Ariel Gottfeld

Ariel Gottfeld

Cash flow is the backbone of every small business. It’s what keeps your operations going, your customers happy and your staff employed. Yet many small business owners struggle to master the art of cash flow management.

Let’s take a more in-depth look at cash flow management for small business and some tips on how to increase your cash reserves.

What Is Cash Flow in a Small Business?

Cash flow is the amount of cash coming in and going out of a small business over a set period of time. A small business’s cash flow can be either positive or negative.

  • Positive cash flow means that you have more money coming into the business than going out.
  • Negative cash flow means that more money is going out of the business than coming in.

    A business’s cash flow is an important indicator of its financial health. Maintaining positive cash flow allows your business to cover its expenses, make new investments and grow.

Cash Flow Importance in Small Business

Why is cash flow necessary to a new small business? Isn’t profit more important? Not necessarily.

Cash flow is important because your business needs cash to stay in operation. However, profitability doesn’t automatically equate to having cash on hand.

Why Is Cash Flow More Important Than Profit for a Small Business?

Many small business owners are fixated on profit when they should be focused on cash flow. In fact, one of the top reasons small businesses fail is because they run out of cash.

A business can still turn a profit and have negative cash flow. For example:

  • If you earned a 20% profit on your products but your expenses were greater than your income, your business would have a negative cash flow.
  • Maybe your business turns a $40,000 profit this month, but you only receive $9,000 of that because the rest is tied up in accounts receivable.

Profit is essential, yes. But cash flow is even more important. With negative cash flow, your business will struggle to:

  • Maintain inventory
  • Pay staff
  • Pay debts
  • Pay suppliers and vendors

It’s hard to stay in business when you run out of cash. But with proper cash flow management, your business can turn a profit and have enough money to cover all of your expenses.

Cash Flow Problems in Small Business

Cash Flow Problems in Small Business

Most businesses face cash flow problems at some point. Finding ways to address and overcome these issues is the key to success. Here are some of the most common cash flow problems small businesses face:

  • Underestimating startup costs: New small businesses often underestimate their startup costs and fail to account for overage. Some small businesses run out of cash before they even open their doors.

  • Slow receivables collection: When customers or clients are slow to pay, it has a negative effect on your cash flow.

  • Not having a cash flow forecast: If you don’t have an estimate of how much cash will be coming into and out of your business, you’ll have a more challenging time creating a budget and making smart business decisions.

  • High overhead costs: If your overhead costs exceed your income, your small business will experience cash flow problems. The only way to win this battle is to increase sales or cut back on your overhead.

  • Low Profit Margins: Pricing is a challenge for every business. If your prices are too high, you’ll struggle to make sales. Your profit margins will be too low if your prices are too low. Low profit margins can also be a sign that your expenses are too high.

    These are some of the most common cash flow problems that small businesses face. Some small businesses will face other challenges that affect their cash flow. In any case, it’s important to know how to deal with cash flow problems to keep your business afloat.

How To Deal with Cash Flow Problems in Small Business

If your small business is struggling with cash flow problems:

  • Use cash flow planning. A small business cash flow statement can help you understand the financial health of your business. A cash flow forecast allows you to predict your future cash flow and make decisions or preparations now to mitigate issues that may come your way.
  • Make it easy to get paid. Online invoicing and subscription solutions can help ensure that the cash from sales is getting into your business bank account more quickly.
  • Reduce your costs. Cutting back on expenses and overhead will improve your cash flow immediately.

The goal is to shift your cash flow into positive territory to ensure more money is going into your business than going out.

How To Manage Cash Flow for a Small Business: Cash Flow Management Tips

How To Manage Cash Flow for a Small Business: Cash Flow Management Tips

Overcoming cash flow problems is a great start, but how do you maintain positive cash flow moving forward?

Cash flow forecasting can help you get a clearer picture of where your cash flow is headed and potential pitfalls that may have a negative effect on your cash reserves.

Here are some other helpful tips on how to manage cash flow for small businesses.

B2B Cash Flow Management

  • Send invoices immediately: Don’t wait to invoice customers – do it immediately. Invoicing is one of the quickest ways to get cash into your business. The sooner you bill customers, the sooner you’ll get paid.

  • Follow-up with late-paying customers: When customers are late making payments, don’t wait to follow up. Reach out immediately. If late payments are an issue, adjust your policy to include a late fee or reduce the time customers have to pay their bills. You can also send late invoices to collections or sell debt to raise money.

  • Keep a close eye on your cash flow: Careful monitoring of your cash reserves can help you address issues quickly before they progress into more significant problems.

B2C Cash Flow Management

  • Offer discounts during slow periods: Many B2C businesses have slow periods. To help maintain cash flow, offer discounts during slow periods to encourage sales.

  • Find ways to cut back on expenses: Cash flow management tools can help you keep a close eye on your incoming and outgoing cash. Revisit these figures regularly to see if there are ways to cut back on expenses.

  • Use credits and loans when necessary: If you’re struggling to get through a slow period, don’t be afraid to use credit or loans to stay afloat if you know you’ll be able to make these payments in the near future.

How To Improve Cash Flow in a Small Business

If your business is struggling to maintain cash flow, here are some tips for increasing cash flow for small business operations.

  • Offer discounts for early payments: If customers are routinely paying late, consider offering discounts for making early payments. Yes, your profit will take a hit, but the money will flow into your bank account more quickly.

  • Lease instead of buy: Buying may be less expensive over the long run, but leasing equipment and supplies will keep more money in your bank account right now.

  • Keep a close eye on your inventory: Only buy what you need to avoid having too much of your cash tied up in your inventory.

How To Maintain Cash Flow in a Small Business

To maintain positive cash flow:

  • Be strategic about bill paying: Wait as long as possible to make payments and try to spread them out. For example, rather than paying all of your bills on the first of the month, make payments on or the day before their due dates.
  • Negotiate with suppliers: Reach out to see if suppliers can give you a better price.
  • Improve your credit policies: Conduct credit checks before extending credit to customers. Require cash-on-delivery for customers who routinely fail to pay on time. Make sure that invoices are sent promptly.

How To Help Small Business Owners Control Cash Flow

Many small businesses struggle with their cash flow because they aren’t looking ahead or making data-backed decisions.

If you really want to know how to increase cash flow in a small business, here’s a tip: Use cash flow projection tools.

Why Use Small Business Cash Flow Projection Tools?

Cash flow projection tools can help you plan for the future and protect your business’s financial health. Using your current income and expenses information, you can create accurate cash flow forecasts that will help you:

  • Plan for slow periods
  • Invest in growth and equipment strategically
  • Pinpoint areas where you can cut back on expenses
  • Find ways to increase profit

Finding the right tool for the job is crucial. That’s where Cash Flow Frog comes in.

Cash Flow Frog - Best Cash Flow Software for Small Business

Cash Flow Frog makes it easy to create an accurate cash flow forecast for small business operations.

With an accurate cash flow forecast, you can see where your business is headed. But Cash Flow Frog can do so much more than create forecasts. It can also help with:

  • Small business cash flow tracking. Compare planned vs. actual results to keep a better pulse on your cash flow.
  • Business decisions. Use scenarios to see what may happen if you take advantage of a new opportunity or launch new products or services.
  • Customer insights. See which customers pay on time and which ones habitually pay late.
  • Projects, allowing you to plan far into the future.

If you’re looking for small business cash flow help, Cash Flow Frog’s intuitive tools make it easy to identify potential cash flow issues, make smarter decisions and find ways to increase cash flow into your business.

Cash Flow Statement for Small Business Examples


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