Smart small business cash flow management is the bedrock for long-term, sustainable growth. That means converting sales into cash as quickly as possible, while reducing and extending your payments, to build a cash cushion. How? Here are 12 tips for how to improve cash flow management and position your business for growth.
1. Forecast cash flow
The first step for effective cash flow management is forecasting. AKA predicting how much cash will go in and out of your business—next month, next quarter, and next year. The more accurate your cash flow forecasting, the better you'll be able to plan for future cash shortages.
Say you have a large equipment repair next month that's likely to impact your ability to pay your bills. By implementing cash flow forecasting, you'll have enough time to plan and rein in your expenses or even look into leveraging a small business line of credit to ensure you'll have the proper cash flow to keep your business running. Even with the large payment.
Whether you do your cash flow forecasting manually with a spreadsheet or use a financial planning tool, the key is making sure you account for ALL cash inflows and outflows. From anticipated sales revenue, investments, and receivables collections to salaries, rent, inventory purchases, and loan payments. More accurate inputs make more accurate forecasts.
Consider how BILL customer, Q Foundation, leveraged improved visibility into its financial data for better cash flow forecasting and money management.
Brian Basinger, Founder and Executive Director, explains.
“We built a system where lawmakers can get a clear view of exactly who's getting funding and where it's going. It shows how we establish community-based equity targets, and then how we're meeting those targets. Because they can see results, they keep giving us money.”
Better visibility, and thereby better cash flow forecasting, has also made easier work of securing funding—and easier reporting to lawmakers. Absolutely essential for a non-profit like Q Foundation.
2. Invoice promptly
Not staying on top of invoicing is a common mistake small business owners make. Putting off sending invoices means your customers can't pay you, which can lead to cash shortages.
Invoicing cadence can vary quite a lot based on your credit terms and particular business or industry norms. The most common cadences are:
- Weekly
- Bi-weekly
- Monthly
- On milestones
- Once work is completed or product delivered
But whatever your invoicing cadence is, you should consider automation to streamline the process and sync with your accounting or invoicing software. The easier you can make the process, the less likely you are to put it off.
3. Manage receivables
Profitable companies can still experience cash flow issues due to having too much revenue tied up in receivables instead of their bank accounts. But by staying on top of their receivables, management of cash flow is that much easier.
The key to effectively managing receivables is enforcing payment terms and following up on late payments. Consider offering incentives for on-time or early invoice payments, like a discount for paying within a week. Alternatively, you can try deterrents, like fees or interest for late payments.
Chronically late-paying customers might necessitate requiring up front payments instead of extending credit to make sure you get paid.
4. Control spending
Reining in your spending should always be a go-to for managing cash flow. Sure, you have to spend money to make money sometimes. But saving money is often just as effective.
Whenever you're considering spending money on your business, take a look at your expenses with an investment mindset before you commit. Take a step back and consider whether the expenditure will boost revenue, reduce costs elsewhere, or even improve efficiency.
An easy example is new hires. Will another employee bring in more sales or bring new skills to the company? Will they reduce workload so you can focus on long-term growth?
3 more ways to control business expenses:
- Make a budget and stick to it
- Work with suppliers to negotiate better prices or discounts
- Use automation to streamline tasks and free up time
5. Keep inventory in check
Keeping inventory in check by avoiding over or understocking can help you save money, reduce waste, and help you improve your small business cash flow management.
Use inventory management tools to track levels in real time, notify you when supplies are low, or automate orders so you never run out.
6. Negotiate payment terms
Negotiating with your vendors for more favorable terms is a solid strategy to improve your cash flow. If your current agreement is net 30, consider asking for net 60 or 90. Especially if you have a long-standing relationship with the vendor.
Alternatively, you could ask to have late fees waived. When done with respect and directness, negotiating new payment terms isn't as daunting as it may seem.
Always reach out early, well before payments are due. Last minute requests for new terms are poor form and no one likes to be rushed.
Think about what your vendors will get from the renegotiated terms. Increased order volume for improved cash flexibility, perhaps?
And remember to aim high, but be reasonable. Negotiations are all about give and take.
7. Know your tax obligations
Small business cash flow management is difficult enough even without factoring in tax obligations. Surprise tax bills can create cash crises if you're not prepared.
The remedy is maintaining accurate bookkeeping, making estimated tax payments, and filing your returns on time. Keep a close eye on your tax obligations—like sales, excise, and payroll tax—to save yourself from unnecessary penalties or fines.
When in doubt, turn to your accountant or tax professional to help estimate your tax obligations so you have the cash on hand to cover your tax payments.
8. Regularly monitor cash flow
We already talked about why cash flow forecasting is important. But just as important is regularly monitoring your cash flow so you can update that forecast.
Because when market conditions, costs, and goals change, so can your cash flow.
Enter a statement of cash flows, which outlines how your cash position has changed over the last month, quarter, or year.
By preparing and reviewing your statement of cash flows on a regular basis, you can easily see any potential cash flow issues early. So you can make adjustments before they get out of hand.
Want a real world example? See how apparel manufacturer Bombas used cash flow visibility to predict and plan for success.
9. Leverage tech
If your budgeting, accounting, and financial reporting is still in spreadsheets that need to be updated manually, managing cash flow is going to be tough and time-intensive.
That's why financial tech tools are so quickly being adopted by small businesses to make managing their cash flow easier.
Using accounting software to digitize data entry is the first step. Next is implementing automation platforms to streamline budget controls, track expenses in real time, automate preparation of financial reports, and provide financial planning insights.
Want a real world example? Here's one from Merchant e-Solutions, who use BILL Accounts Payable to simplify their payments and calm the chaos.
“BILL has made our payment process pain free,” says Lori Brown, SVP and corporate controller. “We now pay our bills in a timely manner and that’s improved our cash flow and enhanced our reputation with our vendors. At this point, I don’t know what I’d do without it.”
10. Establish a cash reserve
Prepare your business for unexpected costs or disruptions by establishing a cash reserve.
Three to six months of operating expenses is a good place to start. But the amount of money you'll want to set aside should be based on your specific business, industry, and financial obligations.
If that seems like a lot right now, don't worry. Start by setting a goal to have one month of operating expenses in your business savings account and go from there. As your financial health improves, increase your goals and keep building your cash reserves.
Even a modest cash reserve can make weathering unexpected challenges without negatively impacting your cash flow easier.
11. Over-communicate with customers
Over-communication should be the rule when billing customers. Make sure to add notes like "payment expected upon invoice receipt" and "interest charged for all payments later than 30 days" to invoices with your customers when you bill them to avoid any confusion.
Want to find where problems are coming from? Do some digging. Running a report to categorize accounts receivable according to how long invoices are outstanding can aid in identifying chronically late or delinquent payers.
Another real world example comes from Niche, who used real-time cash flow oversight to improve their vendor relationships.
12. Ask for help
Don't be afraid of asking for assistance. As a small business owner, cash flow management can be overwhelming, especially as you're seeking to implement new best practices. Reach out to an accountant or bookkeeper for help or answers to questions about budgeting, forecasting, and cash flow management.
Need more working capital to cover payroll, accounts payable, or other unexpected expenses? Consider applying for a line of credit or a bank loan to tide you over as you continue to improve your cash flow.
Next level cash flow management for small businesses
Maintaining positive cash flow is critical to your success. With these tips, you can stay on top of your finances and better plan for the future.
BILL's financial operations platform can help you create and pay bills, send invoices, manage expenses, control budgets, and access the credit your business needs to grow—all on one platform. And with BILL Insights and Forecasting, you can predict future cash flow, uncover trends and opportunities, and maximize your business potential.
Merchat eSolutions knows the impact firsthand.
“BILL has made our payment process pain free. At this point, I don’t know what I’d do without it.” - Lori Brown, SVP and Corporate Controller at Merchant e-Solutions
Request a live demo or start your risk-free trial today to see how BILL can help you improve your small business cash flow management.
For a broader perspective, you can also check out The Strategy Shift: How Today’s Leaders Master Cash Flow, a free three-part virtual series exploring how finance leaders are strengthening visibility, efficiency, and control.
Small business cash flow management FAQs
How much cash flow is good for a small business?
Three to six months of operating expenses is a great goal. But even one month is a good start you can build on over time.
What is an example of a cash flow in a small business?
Cash flows both into and out of small businesses every day. Purchasing inventory is cash outflow. Selling that inventory is cash inflow. Paying workers or utility bills? Out. Getting a loan or business credit line? In.
What percentage of small businesses fail due to cash flow?
According to SCORE, 82% of small businesses fail due to cash flow problems.1 However, cash flow is just one metric. How much money is flowing into and out of a business can't definitively predict if a business is succeeding or failing.
1The #1 Reason Small Businesses Fail - And How to Avoid It, SCORE, 2023
