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02.22.2018

Finance  |  5 min read

Cash Flow Management 101: What All Small Business Owner Needs to Know

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Samantha Novick

Cash is the beating heart of any small business. Without it, you can’t pay employees, buy inventory, or invest in future growth. Cash is king—without it, profits don’t matter. According to a U.S. Bank study, 82 percent of business failures are due to poor cash management. Building good habits for cash flow management will help you weather the bad times and double-down when opportunity strikes.

Cash-flow management: Products to sales to cash, quickly

In a nutshell, cash flow refers to the movement of funds in and out of your business. Cash flowing in comes in the form of accounts receivable from customers, and cash flowing out includes accounts payable to vendors, as well as one-time and recurring expenses. As you probably know, the faster you can convert inventory to products to sales to cash in your bank account, the better off you are.

While positive cash flow is the goal of every business owner, negative cash flow isn’t always bad (think of a large cash outlay to open a new location). Obviously negative cash flow isn’t good if it’s repeated or unexpected, and good cash flow management practices can help you predict shortfalls and identify ways to smooth out your cash flow.

Think cash, not profits

Knowing if you’re profitable isn’t the same as knowing what your cash flow is. Inventory, accounts receivable, etc. all feed into your cash flow and aren’t tracked on a P&L statement. As an example, if you invoice a customer, that counts as revenue—but you need to get paid for that invoice for the cash to actually flow. For many small businesses, careful cash flow management is a crucial component of reaching profitability. Growth requires cash, and having cash on hand will allow you to invest in the future and pay expenses that come before revenue.

Projecting cash flow

As a small business owner, you should always have two numbers in your head. One number is the amount of cash you have on hand now, and the other is the amount of cash you expect to have six months from now. If you can’t answer the first question, you should investigate now; before you finish reading this post. A cash flow analysis will help you with the second number. You should be precise, but realize that the projection is an educated guess—you’re going to make assumptions about the future that are not certain.

Ideally, you should perform a cash flow analysis at least once a month. Your projection starts with current cash on hand, and then maps out cash inflows and outflows over a given period of time. Think about potential one-time expenses (new equipment), fixed expenses (rent) and variable expenses (payroll, inventory). Project future sales, but remember to think about when you’ll get paid—not close the deal. If this seems overwhelming, SCORE (in partnership with the Small Business Administration) offers a template for financial projections.

Cash flow best practices

Let’s say you’ve gone ahead and projected your cash flow for the next six months, and things look tight. Luckily, we’ve got some nuts-and-bolts tips to improve your cash flow. It starts with a mindset: delay your own cash outlays as long as possible, and get paid as quickly as possible! This doesn’t mean breaching contracts or being a bad partner—it just means being smart with your cash.

Stay on top of your accounts receivable

Think about your payment terms with your customers. If possible, structure contracts and invoices to be paid upon delivery—minimize the use of net 30 or 60 payment terms. Invoice customers immediately, and follow up if you aren’t being paid on time.

For new customers, it’s worthwhile to evaluate credit risk before starting work—Dun & Bradstreet is a great option if you’re uncertain about a potential customer’s ability to pay. For large projects, think about structuring your contract to be paid on milestones, as opposed to upon final delivery; this helps ensure you’re going to collect cash for services rendered in the meantime.

Discounts can be a great incentive for customers to get you the cash you need: they can reduce profits, but if they keep cash coming in, that may be more important. You can also penalize late payers.

Hacking your accounts payable

Every business has expenses. Businesses who are good at managing their cash know how to pay them out in the most efficient way possible. Use electronic payments, so cash is in your account until the last minute it needs to be paid. Take full advantage of payment terms—if you have a net 30 or 60 contract, use it! It’s also worth segmenting your payments into those that are business-critical (rent, taxes, payroll) and those that if you had to, you could let slide. Maintaining good relationships with vendors and suppliers is crucial.

We hope this post has inspired a cash-first mindset that will help you grow and reach your business goals.

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Samantha Novick is the social media manager at Bond Street, a company focused on making small business loans simple, transparent, and fair.


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