How to Manage Cash Flow in a Small Business

Cash flow can make or break a business. In fact, a U.S. Bank study found that 82% of failed businesses cited cash flow as a contributing factor to their demise.

We don’t want your business to be another statistic. Learning how to manage cash flow in a small business will take time and effort, but the future of your operations depends on it.

Let’s take a closer look at how to take control of your cash flow and keep your business running smoothly.

How to Manage Cash Flow in a Small Business

Find Your Break-Even Point

One important step in managing cash flow for a small business is to find your break-even point. Your break-even point is the point at which your total sales are equivalent to your total expenses. 

You’re not turning a profit, but you’re not in the red. You’re breaking even.

Understanding your break-even point can help you determine whether your cash flow is headed in the right direction or if corrective action must be taken to get your business’s finances back on track.

Use Accounting Tools to Track Income and Expenses

When it comes to cash flow management, tools are your best friend. Accounting tools can help you manage your income and expenses automatically, which allows you to keep a close eye on your:

• Cash inflows
• Cash outflows

These tools connect to your bank account, so they grab your data automatically. Many will even create cash flow forecasts for you, so you can take steps now to avoid future cash gaps.

You can also use tools like BILL to help manage cash flow by staying on top of your bills.

Make it Easy for Customers to Make Payments

Healthy cash flow largely depends on customers making timely payments. The quicker customers and clients pay, the better. Delays can lead to cash gaps that make it difficult to make ends meet.

You may complete a job or fulfill an order, but until the customer pays for your goods or services, it’s nothing more than a transaction on paper.

To speed things up, make it easy for customers to make payments. Offer them multiple payment options: credit card, cash, online payments, etc. 

Offering a small discount for early payments can also motivate customers to pay as quickly as possible. Another option is to require payment, or even partial payment, upfront.

Bottom line, quick and easy payments will help keep your cash flow healthy.

Keep Business and Personal Finances Separate

One-in-five business owners commingle their finances, which means that they don’t keep business and personal finances separate. Managing your cash flow and doing taxes is challenging when you have personal and business expenses mixed together.

You should properly pay yourself and keep both of these accounts separate so that you can:

• Better understand your cash flow
• Manage expenses better
• Run accurate forecasts and projections
• Avoid piercing the corporate veil 
• And more

If you’re not keeping your business and personal accounts separate, you need to start. Separate accounts provide a clear financial standing of your company and will help you make data-driven business decisions.

Engage in Cash Flow Forecasting

Cash flow forecasting provides invaluable insights into your financial future. You can run a forecast to:

• Take out loans if cash is projected to run low
• Invest in operations if you have excess cash
• Speed up debt repayments

Forecasting allows you to manage liquidity, engage in growth, and planning properly – which is discussed more below.

Plan for High and Low Seasons

Businesses often have high and low seasons. You may be an exception to seasonality, but there are typically:

• Low seasons
• High seasons

Seasonal trends can help you make it through the rest of the year with money in the bank, but poor planning can cause you to run out of cash quickly. Planning for ups and downs before you run into liquidity issues is a smart idea.

Consider:

• Saving a large portion of the busy season’s revenue for the slow season
• Creating other streams of income to get you through the low period
• Taking out a line of credit to provide financial flexibility when you need it most
• Hiring seasonal employees to keep expenses lower during the slow season

If your business is very seasonal, it may be more profitable to close your doors during the slow season. You can also try to partner with other local companies during these months to keep cash coming in.

Final Thoughts

Managing cash flow for small businesses is a necessity to leverage your liquidity and grow your company. Preparation and planning can help you reduce the need to take on debt and invest in other areas of operations.

If you’re struggling to learn how to manage your business’s cash flow or want to offload the work to someone else, we offer virtual CFO services that can help:

• Manage cash flow
• Forecast working capital
• Improve your current cash flow
• More 

Click here to schedule a consultation and learn more about how we can help you manage your small business’ cash flow.