Cash Flow Management: A Comprehensive Guide

Your business could be headed for trouble if you don’t have a handle on cash flow.

A study by U.S. Bank found that 82% of the time, poor cash flow management or poor understanding of cash flow contributes to business failure. Don’t be a statistic! We’ve drilled down into cash flow details you need to know. Visit the SmartBiz Small Business Blog for more solid tips about strengthening your bottom line.

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Why is it Important to Manage Cash Flow?

Cash flow is king! If you have a handle on your business cash flow, you’re ahead of the game. Here are the reasons you should pay attention to your cash flow to strengthen your business.

  • Stability. Cash on hand gives you better buying power and offers protection against loan defaults or foreclosures. Erratic or missed payments can cause your credit score to take a dive.
  • Debt Payment. When you borrow money to buy equipment, inventory and other items to run your business, you’re using future cash flow to make those purchases. You’ll need positive future cash flow to pay back that borrowed money. Defaulting on debts ruins your credit rating and can sink your business.
  • Business Growth. With strong cash flow (and debt management), you can grow your business. Buying inventory, increasing marketing, purchasing equipment and hiring employees are just a few ways you can use strong and steady cash flow.
  • Securing a Low-Cost Loan. In addition to running your business profitably, having sufficient cash flow is important if you’re seeking outside funds. Strong cash flow (along with a healthy credit score) generally means you’ll get better rates and terms.

SBA Loans are known as the gold standard due to low rates and long terms. To qualify for an SBA loan through a SmartBiz Loans bank partner, you’ll need to demonstrate sufficient business and personal cash flow to service all debt payments, demonstrated by 3 years of tax returns and other financial data.

Basics of Cash Flow

Cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Cash flow shows how liquid a company is and indicates if the company will remain in the black.

  • Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, pay expenses and provide a buffer against future financial challenges.
  • Negative cash flow means that your company has more money going to other businesses than it’s receiving from its clients. It doesn’t necessarily mean that your company isn’t turning a profit – it just means that most of your earnings have yet to move out of accounts receivable and into cash. Negative cash flow also indicates that a company’s liquid assets are decreasing. It is thus not sustainable over time.

How to Measure Cash Flow

The cash flow equation is pretty simple: Cash in minus cash out. However, the simplicity of this fundamental cash flow equation can mask the complexity of measuring your cash flow. Small businesses such as yours typically have quite a few types of cash going in and out, so cash flow analysis can take some work.

Listing all your income and expenses in a cash flow statement spreadsheet can help. To start, create one column for all your cash in and cash out. Then, create additional columns for each month of the year.

Input values such as the cash you had the month before, the cash your company brought in this month, the loans you’re repaying, and the cost of goods sold (COGS). Then, subtract your cash out from your cash in to determine whether you have positive or negative cash flow.

Keep in mind as you enter numbers that you should only include cash that you actually have. That unpaid $10,000 invoice isn’t yet part of your cash. You can use that invoice in cash flow projections or financial forecasting, but it’s irrelevant for determining your immediate cash flow.

For extra assistance measuring cash flow, o ur friends at NerdWallet dive deeper into cash flow calculations and include helpful spreadsheet templates here.

How to Improve Cash Flow

There are solid strategies you can use to increase and stabilize your cash flow. For in-depth information, review How to Increase Small Business Cash Flow.

  • Invoice regularly. This strategy helps you plan how payments will affect cash flow. Your customers and vendors won’t be surprised when a bill is due and you’re more likely to receive payment on time.
  • Collect receivables. It’s one thing to regularly send invoices. It’s another thing to actually collect them. In fact, it’s not uncommon to look at a small business’s financial records and notice receivables that have gone uncollected for two years. Accumulating uncollected invoices is a surefire way to find yourself with a cash flow problem, so commit yourself now to soliciting payment for any and all overdue invoices.
  • Increase sales. There are lots of ways you can increase the sale of your goods or services. Check out 10 Tips to Increase Sales for Your Small Business. This article gives actionable strategies you can use to up sales by engaging current customers and attracting new ones.
  • Secure a low cost loan. Although this might sound counter intuitive, a low-cost loan can help with cash flow and provide valuable working capital. Funds can be used for a number of business-building initiatives to boost sales.
  • Offer price discounts. Yes, discounts mean that you’ll have less cash overall, but offering small discounts can prove helpful in some situations. For example, offering a 10% discount on an especially large invoice if the client can pay it early means that you’ll get more money more quickly. And if you urgently need cash to pay your bills, waiting a week instead of a month for that big invoice to arrive can make a significant difference.

Tips for Cash Flow Management

Cash flow management isn’t only about bringing in cash. It’s also about keeping your costs low. That’s why, to improve your cash flow, the below financial management tips are just as important as any actions you take to bring cash in:

  • Spend only what you have. You’ve heard this advice as it pertains to credit cards: Don’t spend money you don’t actually have. Instead of loading your card with $10,000 of interest-generating credit that you don’t have the cash to pay, only spend within your means. Alternatively, as mentioned earlier, other lines of credit such as small business loans can help you spend even amounts of cash rather than unmanageable lump-sums.
  • Be careful with growth. It’s much tougher to properly manage your cash flow when your company is growing so rapidly that you can’t keep track of its spending. You’re likely spending tons of money to fuel your growth, and if you’re spending more than you can handle (a mistake that’s easy to make), you won’t have positive cash flow.
  • Get to know your costs. Although it may seem overwhelming to familiarize yourself with the typical price tags of all your expenses, doing so can help you master your cash flow. Get to know your overhead, salaries, taxes, and more so that, whenever you look at your cash account, you’ll know how much you’ll actually keep – and how much more you’ll need.
  • Make your cash influx more predictable. Look at your books to identify which revenue-earners are the most consistent. Then, commit to regularly pursuing those revenue earners. In doing so, you can bring in more cash and better understand how you’re earning that cash. As a result, predicting your cash flow becomes easier.
  • Negotiate with vendors. Your vendors, especially those with whom you’ve worked extensively, may be open to changing your payment terms. If you’re pressed for cash, speak with your vendors about changing 30-day payment terms to 45-day terms so you can more evenly spread out payments and keep more cash on hand.
  • Encourage customers to pay. An invoice with no directions or payment terms is bound to sink to the bottom of your clients’ priority list. That’s why your invoices should include clear payment terms and directions that show your clients you care about getting your money. Don’t hesitate to send overdue notices, but do think twice about sending client debts to collections.
  • Use software. As a business owner, you probably already use accounting software, and if you do, then you have all the tools you need to digitally manage your cash flow. If not, numerous other platforms can automate and streamline your cash flow management. A quick internet search should bring up many options, and once you have the right platform for your needs, getting started should be easy.

Get Started

Know where you stand by creating an easy cash flow statement. There are several free templates online. We like this one from Microsoft. Start filling in the numbers and take steps to improve your situation if necessary.

Do you have sufficient cash flow and a healthy credit score? Consider a low-cost SBA loan if you’re looking for funds to grow your business and save money. Visit SmartBiz Loans today and discover in about 5 minutes if you’re prequalified for a low-rate, long-term SBA loan with no prepayment penalty.

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