Cash Flow Management: What You Need To Know

Running a business is a balancing act between revenues and expenses. Knowing where your money comes from and where it goes is essential. The goal of any business is to improve positive cash flow.

Tracking and managing these cash flows helps with operating, planning, budgeting, and investing. The best way to see if you are on target is through good cash flow management involving inflows and outflows and understanding how each value is intertwined.

Let’s talk about cash flow management, what it is, how to track it, and multiple ways you can improve and manage cash flow in your business—something every business owner should know!

What is Cash Flow Management?

Managing cash flow is simply tracking the cash coming into your business and cash going out of your business. Of course, it’s a bit more detailed than that.

From tracking how much cash is coming and going, we gain an understanding of the dynamics of what makes our business tick. Our success is tracked through revenue. Our efficiencies are noticed by looking at our expenses. 

Tracking and understanding cash flow is an ongoing task. While preparing a Statement of Cash Flows provides a snapshot of a period in time, keeping track of cash flow on a daily basis is critical.

That way, you always know where you stand with your finances and can be warned of any cash flow problem that may arise.

Cash Flow and Small Businesses

Managing cash flow is tricky for small business owners. A business often starts with an outflow of cash. You are ordering inventory and supplies, getting equipment ordered and set up, and hiring personnel.

Then your product catches on, and you start to ramp up sales. If all goes well, you are soon starting to make more than you spend. A negative cash flow at the beginning becomes positive later on.

Throughout the course of running your business, you might need to make tweaks to stay cash flow positive, and there are several ways to do this.

Three Ways Businesses Generate Cash

It’s important to understand where cash comes from. There are three main areas that a business generates cash:

  1. Cash from operations is cash created through the course of doing business. This includes selling products or services or through depreciation or amortization. Expenses affecting cash include interest payments, tax payments, salaries, tax payments, and the purchase of inventory. Cash can also be realized by cutting costs associated with these expenses. We’ll give you some suggestions about how to do this shortly.
  2. Cash from financing is cash created or raised through activities outside the regular scope of business. This may include stock repurchases, dividend payments, or offering bonds to raise cash.
  3. Cash from investing is cash from property, plant, and equipment. More money would be generated from the sale of such assets. The sale of investment securities, the collection of loans, and insurance proceeds would positively impact cash flow.

How Businesses Track Cash Flow

There are several ways to calculate cash flow, and it’s helpful to use a few methods to provide valuable information:

  • Statement of Cash Flows tracks cash flow from all three areas—operations, investing, and financing. With information from the Income Statement and Balance Sheet, there are a few different methods to calculate cash flows, providing valuable information.
  •  Cash flow projections, also referred to as cash flow forecast, are used to budget and plan for the future. It includes forecasting numbers for several months in the future.

Businesses can track cash flow on the Statement of Cash Flows, but a more detailed cash flow spreadsheet can be used to track each inflow and outflow.

Formal cash flow statements are a snapshot in time, but a spreadsheet can be a dynamic document updated every time money exchanges hands. 

Track types of revenue and costs vs. costs of goods sold. Break down expenses into fixed and variable costs. Fixed costs such as rent, insurance, and fees are the same every month.

Variable costs are a bit trickier to predict as they change each month. Some examples are utilities, supplies, shipping costs, money spent on marketing, and sometimes payroll costs. The spreadsheet will also show if you are turning a profit.

Cash Flow Management Strategies For When Money is Low

If you find yourself with a shortage of positive cash flow, you can either increase your inflows or decrease your outflows. Here are some suggestions: 

  • Increase your cash inflows by selling more products or services. Explore marketing strategies to grow your customer base. Add more offerings and upsell your current customers. 
  • Reduce outflows by cutting costs. Some ideas might be searching for a lower-cost supplier of inventory or negotiating for bulk supplies. Businesses also can affect their bottom line by examining discretionary spending. Examples include paid lunches, company cars, or free donuts on Fridays. Examine each expense to see whether it is necessary or could be done cheaper.
  • Examine your inflows to see when they are hitting the books. If customers are delaying payment, this will impact your bottom line. Improve payment systems or deliver goods only when the payment is received.
  • Apply for loans or search for investors to grow your business. This will add cash to your bottom line. Make sure you use the investment in ways that will increase cash flow, as the loan will also influence your outflows.
  • Outflows can be affected by timing as well. Try to juggle your expenses, so they hit your accounts on a steadier basis. One way is to see if your insurance or inventory can be paid every month rather than in one lump sum. 

Benefits Of Cash Flow Management

Creating a steady cash flow is excellent for your mental state and the bottom line. You will be able to grow your business organically and creatively, rather than through reactions. 

Reduce Stress

Some business owners panic when they perceive a slow month for income or when a hefty invoice comes in that they weren’t expecting.

The rising price of inventory is a considerable stress as well. Preparing a cash flow statement and projection will ensure there are no surprises.

Even if things seem bleak, you will be equipped with the knowledge to deal with them. It’s better to shop for a loan when things are going well than when you are months behind on the rent. A cash flow statement will let you see shortfalls coming.

Know When to Grow

When things are going well, and you see a positive cash flow for several months, you will be able to take advantage of a current trend or new technology. Extra cash on hand could signal the perfect time to grow your business by adding a new product or service.

Your cash flow projection lets you look ahead to determine the best time to make a move and how that move will affect cash flow in the future.

Gain Leverage

Presenting a Statement of Cash Flows or a cash flow projection shows forethought when applying for a business loan or requesting a better rate from a supplier. Lenders and creditors can see your ability to repay funds. In addition, transparency builds trust.

Improve Budget Accuracy

Cash flow projections can help with budgeting. The numbers on a cash flow projection are more accurate than an actual budget. Budgets tend to miss items or not itemize them.

For example, you can budget dollars for office supplies or marketing, but what exactly does that mean? You can break those down into specific categories, and places to cut become more apparent. 

A cash flow statement and projections come from previously prepared statements where everything is laid out, so budgeting is based on actual numbers rather than guesses.

How to Improve Cash Flow

While cash flow can be affected by a single item, numerous small steps can help build cash flow over the long term.

Implement a few of these suggestions, brainstorm some of your own, and see how it affects your bottom line.

Focus on Inventory Control

It’s essential to have enough inventory to meet customer demand, but not too much to cause spoilage or storage issues.

Inventory purchased in bulk might save money in the long term, but then you will need a space to store it—do you have warehouse space available, or will you need to spend money on renting one?

On the other hand, if you run out of a critical component, you may need to pay a premium to get it quickly and delay production until the item arrives. 

An inventory control system can help you track what you have on hand and how much you are paying each month. Negotiate a monthly payment or purchase with your supplier to keep inventory costs steady.

Lease, Don’t Buy

When you buy a piece of equipment, your initial outlay of money is high, but you can depreciate the cost of the equipment over time. Buying equipment is also required when a piece of equipment is unique or customizable.

But leasing makes a lot of sense if you are purchasing equipment that will need to be replaced in just a few years and you have the cash to make the monthly payments.

Leasing may also allow you to acquire better equipment that you might not be able to afford with a bank loan. 

Consider a Line Of Credit

If you need to pay bills before a client pays or want to take advantage of growth opportunities, a line of credit will immediately give you access to funds.

If you don’t need it, you don’t have to use it, and you can use only as much as you need and then pay it back quickly. Weigh the options of paying with cash or on credit, as they both affect your bottom line.

Send Out Invoices Right Away

Businesses may set a schedule where they bill a client once every two weeks or once a month. If the client uses your services early in the period and you wait until this set billing period, you are waiting for revenue.

Invoice customers as soon as possible and encourage quick payment. You may set up online payments or credit cards for this purpose. You can also ask customers for a deposit and get some money upfront. 

Look For Alternative Revenue Streams

Brainstorm ideas to expand your existing products and services.

Maybe add a complementary product or service or a whole new line. Perhaps you can add a subscription, an upgrade to an existing service, affiliate marketing on your website, a limited-edition item, or a one-time project.

If they make sense, new revenue streams can breathe new life into your company and bring in new clients that love your new product and are introduced to your existing line.

Negotiate Your Payments With Suppliers

It’s always a good idea to check with your suppliers to see if you can negotiate your price and payment terms. If you know you have cash coming from clients at the first of the month, see if your suppliers will accept payment a week or two later. 

Use a Business Credit Card

A business credit card can serve a two-fold purpose. First, it frees up cash for other purchases. Second, a credit card may offer cash back for certain purchases.

Take care to keep in your budget and not run up a large amount of debt; that money will still be accounted for on your business expenses, just not as cash.

Use a High-Interest Savings Account

When you find yourself with a positive cash flow or extra income, stick it in a savings account with a high-interest rate. Your money can grow while you determine your next move. Even in the short term, you can earn some extra cash.

The Bottom Line

No matter what your business is, you need to track cash flow. Depending on the economy, you might need to track cash very carefully. A cash flow statement, cash flow projection, or a detailed spreadsheet will provide you with valuable information on your finances.

To help you keep more of what you make, check out more articles here. And don’t forget to sign up for our mailing list to be notified of new articles as soon as they are published!

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