Managing Cash Flow: 10 Practical Tips For A Business

For many entrepreneurs starting a company for the first time, cash flow management is often the last thing on their minds. Most entrepreneurs will focus on things such as developing new products or services, launching marketing campaigns, or even setting up meetings with new clients.

This is part of the reason why about 20% of new businesses fail by the end of the 1st year.

In this article, we will share 10 practical tips for managing your business’s cash flow. By implementing these strategies, you can improve your business's financial stability and ensure that you have the resources you need to grow and succeed in the future.

When running a business, it may sometimes feel like cash only flows one way (out of your business), but actually, it moves in both ways,

• Cash coming into the business: This usually takes the form of clients purchasing your goods or services. In a case where clients don’t pay at the exact time of purchases, some of your business’s cash flow will show up in the form of accounts receivable in your cash flow statement.
• Cash going out of the business: This would namely be payments or expenses to produce your goods or services. This can include a range of expenditures, such as rent or mortgage payments for leased or owned business premises, employee wages, and benefits, various taxes, including income and sales taxes, supplier payments for raw materials, and utility expenses. These expenses would show up in your cash flow statement as various forms of accounts payable.

If your business has more money coming in than going out, it is in a positive cash flow position or ‘in the black.’

On the other hand, when more money is going out than coming in, your business has a negative cash flow and risks being overdrawn or in debt.

Understanding and having control over your cash flow will help you pinpoint opportunities to boost your business’s performance, from increasing income to reducing expenses. 

While both cash flow and profit are important financial metrics, they represent different aspects of a business's financial health.

Cash flow refers to the actual movement of money into and out of a business. Profit, on the other hand, measures a business's financial performance over a specific period.

Technically, it is possible for your company to turn a profit even if it records no cash. The reason behind this is that profit is just a concept used in accounting, whereas cash is the amount of available money in your business’s bank account. But remember, profit does not enable you to pay bills and meet your financial obligations. Profit will include assets like accounts receivable (money which is owed to your business by customers), which are not immediately collectable and, as such, are not able to receive immediate cash. Always make sure you have enough cash in your company’s account to pay for monthly and ongoing payments.

Cash is the lifeblood of any business operation. In fact, over 80% of businesses failed because of poor cash flow management, resulting in a lack of cash, including liquid assets such as bank deposits, investments, or accounts receivable.

Regardless of your business's size or industry, cash is essential, particularly in these scenarios:

• When you just started a business: New businesses and startups often face significant upfront expenses that can strain cash flow, such as marketing, inventory, equipment, and recruitment costs. Limited sales and potential difficulties securing credit from supplies are also significant challenges. 
• When your business starts to grow: Expansion can lead to increased expenses and working capital needs. These expenses can strain your cash flow, particularly if your revenue growth doesn't keep pace.
• When your business faces changes: Changes in market conditions, customer demand, supplier relationships, or regulatory requirements can significantly impact your cash flow. For example, economic downturns can lead to decreased sales. 

Poor cash flow management can result in short-term cash flow issues, such as not being able to pay your operating expenses as you are still waiting for payments from your customers. On the contrary, effective cash flow management can help anticipate and mitigate these challenges by identifying potential cash shortages in advance.

Effective cash flow management is essential for keeping good financial health. It involves understanding and optimising the balance between cash inflows and cash outflows to ensure you have enough amount of cash on hand to cover your business needs. 

Here are 5 strategies to ensure a healthy cash flow for your business finances. 

Tracking your actual incoming and outgoing cash flow regularly can help you promptly identify issues like cash shortfalls and optimise financial planning. This involves reconciling bank statements, reviewing financial records, and staying updated on your business’s current cash position so you can take the necessary steps to maintain a healthy cash flow. 

Regular cash flow tracking is also a building block for accurate cash flow projections. It allows you to forecast your cash reserves and identify potential issues in advance, improving your cash management and financial position. 

A cash flow forecast provides a projected overview of your business’s income and expenses over a specific period, giving you insights into your future cash inflows and outflows. By knowing these in advance, you can identify potential cash shortages or surpluses and improve overall financial management. 

Additionally, creating best-case, worst-case, and most-likely scenarios can also help you assess different potential outcomes.

You can create a cash flow forecast using spreadsheet software like Microsoft Excel or download free templates online. Here’s an example of a standard cash flow forecast:

We recommend designing your own invoice template so that it is easy and straightforward for you to fill in. You do not want something that will confuse your client or cause you to make mistakes. Additionally, clear payment terms, including the due date and any applicable discounts for early payment, should be set to minimise delayed payments.

Using reliable invoicing software to create, send, and keep track of paid and outstanding invoices is also a good practice to get paid on time. 

Another suggestion is to send the invoices by email so that they do not get lost in the post and get to your recipient as quickly as possible. It also makes chasing invoice payments much easier because there will be records of communication that you may need in the future.

Asking for a deposit or partial payment means you have some cash to use to purchase the materials you need or to pay the team required to perform the job your business is being contracted for.

It is not uncommon to ask for up to a 25% deposit upfront before beginning any work on the job at hand.

If your business involves having products or supplies in stock, it is crucial to regularly review inventory levels, implement tracking systems, and ensure you manage your inventory effectively to avoid stockouts or excess inventory. Keeping accurate track of your inventory reduces the chance of overstocking, which can drain your finances, or insufficient stock, which can result in lost sales.

Even with the most careful financial planning, unexpected circumstances and challenges can arise and disrupt your cash flow and strain your business’s finances. Let’s look at the 5 tips that can help you improve your business cash flow when it comes to those situations. 

Use your cash flow statements to do a cash flow analysis and try to see whether there are any recurring expenses that you could cut back on.

They could be in the form of bills on utilities, rent, payroll, subscriptions, or frequent services.

If you think you need to reduce your expenses, try to cut the costs or negotiate payments where possible.

Past-due invoices are a significant challenge to financial operations and cash flow management. Late payments from customers directly affect a company’s cash flow, especially if it does not have enough money in reserve. They can lead to increased liabilities such as interest on overdue balances, collection fees, and potential legal expenses. 

The best way to motivate your customers to pay outstanding invoices on time is to offer them discounts and benefits, such as discounts on early payments. 

For example, if you offer a 30-day credit term, you can give your customers a 5% discount when you send an invoice if the bill is paid within ten days of receipt.

If not, the full amount will be due by the end of the 30-day credit term.

This tip is particularly important if you are looking to make some cash fast.

Perhaps your business has some old equipment that is sitting in a storage room collecting dust. Do not let it become obsolete.

Consider selling it or renting it out to get cash out of it. This is not only one of the quickest ways to earn cash and generate your cash flow, but it also helps to get rid of unused assets.

When faced with cash flow challenges, exploring financial options can provide much-needed relief. Two common strategies are obtaining a line of credit or loan and invoice factoring. 

• Lines of Credit and Loans: You can use your cash flow statement to forecast your cash requirements and get a line of credit or loan as a safety net. However, be mindful of the amount of money you’re borrowing and the interest rates, as these factors can significantly impact the overall cost and your future cash flow. Carefully consider your repayment terms and ensure they align with your cash flow projection. 
• Invoice Factoring: Invoice or debt factoring involves selling unpaid invoices to a factoring company at a discount in exchange for immediate cash, which can be especially helpful if your business has a significant amount of outstanding invoices from customers. While factoring can provide quick funds, it’s important to understand the associated fees and consider the potential impact on your credit score. 

Business credit cards can offer a comfortable cushion when your business is running low on immediate cash, offering flexible credit limits and potential rewards. However, it’s essential to use them responsibly and track expenses carefully.

Some credit card providers also offer virtual cards. These cards offer added security when making online purchases by limiting their usage to predetermined amounts and merchants, preventing unauthorised transactions and overspending,  and simplifying expense tracking. 

The most effective way to track your company’s cash flow is through a cash flow statement (or report).

It enables you to get an overall view of all money that has come in and out of your business’s bank account and basically to understand your company’s cash position (whether it is positive or negative) every month.

Keeping track of your cash position is significant and fundamental to keeping your company afloat.

The statement is normally split into three parts:

1. Cash from operating activities
2. Cash from investing activities
3. Cash from financing activities

In all those parts, you will be able to identify every cash transaction (both in and out) that has occurred in your business.

Your outgoings will be deducted from your incoming to get your business’s net cash flow.

Here’s an example of a cash flow statement:

Why Use a Cash Flow Statement?

• To track where your business’s money is coming in from
• To understand where your business spends the most money
• To get the ‘cash reality of your business, as opposed to the abstract accounting
• To spot a cash inconsistency or shortage and help you plan for future cash flows. The longer you wait to fix a cash shortage, the further your business’s cash flow will fall.

Simple Methods to Prepare a Cash Flow Statement

• Use accounting software: certain tools will be integrated to help you construct a cash flow statement. If you are unsure how to use it, ask your accountant to assist you with it.
• Find help online: Many services are available online to connect you to experts or offer free templates and tools to enable business owners to put together a cash flow statement, such as  Bench, Spreadsheet, and SCORE. 

A lack of cash flow is a significant threat to businesses of all sizes. Understanding the concept of cash flow is especially critical for startups and early-stage companies to identify potential financial challenges and optimise their resource allocation for sustainable growth. By implementing the 10 tips we provided, you can effectively manage your cash flow and position your business for future success.