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How To Manage Small Business Cash Flow

How To Manage Small Business Cash Flow

Improving cash flow is a smart move for any business. It doesn’t matter how great your business model is, how profitable you are, or how many investors you have lined up. If you’re looking for one area to focus on that will have a dramatic impact on your business, this is it.

Back To Basics: Cash Flow Strategies For Small Business Owners

New and growing businesses often don’t have a buffer of extra cash to get them through shortfalls, because they are always reinvesting. Years with the most significant growth—including the first few years of a business’s lifespan—are also challenging when it comes to cash flow.

Cash flow management is one of many reasons it’s so hard to get a new business off the ground.

Cash flow is on the minds of all small business owners right now. Below we’ve listed some immediate ways you can get cash flow relief for your business.

Cash flow management is the process of understanding and optimizing the amount of money, cash and non-cash, moving into and out of a business. A positive cash flow is more money coming in than going out, and a negative cash flow is less money coming in than the business needs to cover outgoings.

Tips For Improving The Cash Flow Of Your Small Business

To calculate cash flow, a business takes note of how much cash is available at the beginning and at the end of a specific period. This time period may be a week or a month. The business will have a positive cash flow if there is more in the account at the end of the period than when the period began; it will have a negative cash flow if there is less cash at the end.

Getting good at cash flow management is one of the best things you can do for your business. Not only that, it’s a skill you can carry over into other ventures, as well as your personal finances.

Give your business a financial health check with ‘s cash flow calculator. Learn more about your finances and get a handle on your cash flow in less than five minutes.

How To Manage Small Business Cash Flow

Cash flow is not the same as profitability. A profitable business can still be unable to pay its bills. Similarly, just because a business is meeting all of its financial obligations doesn’t mean it’s profitable.

Cash Flow Management For Small Business

Profit is a basic small business accountingterm, which really only exists on paper. Measuring profit is a particular way of looking at a business. It doesn’t tell you a whole lot about how the business is getting by day-to-day.

The first step to calculating profit is to take your total revenue and then subtract the cost of goods sold. The difference is your gross profit.

For example, if you sold $100, 000 in rocking chairs and the chairs themselves cost you $50, 000 wholesale, your gross profit would be $50, 000.

Of course, you would probably have other expenses beyond buying the chairs. For example, you’d need a place to store the chairs, and you might want to run some ads to get more sales. These expenses are called operating expenses, and they get subtracted from your gross profit.

The 10 Best Cash Flow Apps For Small Businesses

Operating expenses include most costs that don’t directly connect to what you sell—things like rent, equipment, payroll, and marketing.

If your net profit is a positive number, you made money. If it’s a negative number, you lost money. This report as a whole is called the income statement, or profit and loss (P&L).

In relation to small business cash flow management, the problem with income statements is that they don’t show your whole business. A few essential pieces of information are missing.

How To Manage Small Business Cash Flow

If you have any business loans or other startup capital to repay, it won’t show up here. Only the interest on those loans is included on a P&L, even though debt repayments can eat up a lot of cash.

Free Cash Flow Forecast Templates

Similarly, if you make a significant equipment purchase, the entire cost will not show up in this section. Instead, that cost will get spread out over the lifetime of the equipment. If you spend $100, 000 on a canning line and you think it will last you 10 years, your income statement will show an expense of $10, 000/year for 10 years, even if you had to pay all of it upfront.

Note that your net profit isn’t taxed at this point, which means it will shrink even more. Even if all of your profit is available in cash, you won’t be able to run out and spend it all in one place.

Finally, many businesses use accrual accounting, which records revenue even if you haven’t received the money yet. On paper, you might have $200, 000 in sales, but if no one has paid you yet, you’re still going to have a hard time paying your bills.

Further, if you carry inventory, all that product has value and gets included on your income statement as well. Of course, to extract cash from your inventory, you need to sell it first.

Cash Flow Can Make Or Break Your Business, So Take Time To Safeguard It

Ultimately, all good cash flow management strategies come down to timing. You may be profitable over the course of a month or a year, but not over a specific day or week. If your bills are due at the beginning of the month, but you won’t have any money in the bank until the end of the month, you’ve got a cash flow problem, even if at the end of the month you made more than you spent.

Here’s the deal with profit: if you’re not profitable on paper, you’re in bad shape. You need to either increase your revenue or decrease your expenses if you want to stay in business. But just because you’re profitable doesn’t mean your business can run on autopilot. You still need to practice cash flow control—especially if you’re growing.

Although it may seem intimidating, there are clear benefits to cash flow control and prioritizing effective cash flow management.

How To Manage Small Business Cash Flow

We’ve put together a cash flow forecast template to help streamline the process and save you time and stress. Download and read on to learn how to use it.

Managing Your Cash Flow

The first and most obvious benefit to managing cash flow and working capital is knowing ahead of time when you’re going to have shortfalls. Don’t find out you can’t make rent after the check bounces. With a good system in place, you can predict shortfalls weeks, sometimes even months, ahead of time, which gives you time to come up with a plan.

Believe it or not, managing cash flow will alleviate a lot of stress. Much of the anxiety entrepreneurs experience around paying bills comes from not knowing what’s going on and worrying about whether or not things will work out.

It’s much better to know what’s coming, even if the outlook is not good. When you know where you stand, you’ll feel prepared. More importantly, you’ll be equipped to deal with it.

When you’re managing cash flow, you know exactly how much money you have to spend on growth. Remember, just because your P&L tells you there’s extra money lying around, doesn’t mean it will materialize in real life.

How To Manage Your Small Business’ Cash Flow Better

Similarly, just because you have $20, 000 in the bank doesn’t mean you can spend it. You might need it to pay for upcoming expenses. When you look at your cash flow over weeks and months, you’ll know how much to keep on hand and how much you can stash away or spend on growth.

Effective cash flow analysis gives you leverage. If you need to borrow money from the bank via a line of credit to get you through a shortfall, or want to get a supplier to give you a break for a few weeks without interrupting service, a good cash flow management system will back you up and establish trust.

Financial institutions generally like to see this kind of planning, especially if you can clearly show when you’ll be able to repay the funds. Suppliers are much more likely to be flexible if you can tell them exactly how you’ll pay and when—rather than cutting communication like most businesses do during tough periods. These people want your business and will be more willing to work with you through the ups and downs if they can trust you.

How To Manage Small Business Cash Flow

Cash flow is significantly more accurate than a budget. Budgets tell you what you want to happen. They’re wishful thinking, and entrepreneurs are optimistic by nature. Cash flow projections tell you what is actually happening so you can deal with it—even if it’s not what you planned at the beginning of the year.

How To Effectively Manage Your Small Business’ Cash Flow

Most of us (myself included) would often rather not think about managing cash flow and just hope it all works out. But it’s not worth the risk. You really will feel better by staying on top of your money.

There are many paid tools out there to help manage cash flow. Personally, I think the free one is the best one: Google Sheets. Anyone can use a Google spreadsheet to create cash flow statements. Although it’s a

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