Cash flow management: A guide for business owners

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Mia Sullivan

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In business land, cash is king. But as a founder, you need to consistently keep enough cash on hand to cover your expenses, which is no easy feat. According to a study by U.S. Bank, 82% of companies fail due to poor cash flow management.

cash flow management

Cash flow management is a vital — yet often unsung — aspect of running a business.

Strategies like paying bills strategically, cutting unnecessary overhead expenses, and carefully tracking monthly cash inflows and outflows will help your venture succeed in the long run.  

→ Download Now: 5 Financial Planning Templates

What is cash flow management? 

Think of cash flow as an equation. It’s the net balance of money moving into and out of your business at a particular time. Simply put, it’s the cash coming in minus the cash getting paid out. 

Positive cash flow means you have more money moving in than out, and negative cash flow means you have more money moving out than in. The goal, of course, is to have positive cash flow. 

Cash flow management involves tracking, examining, and optimizing how your money is moving so that the cash flowing in is greater than the expenses getting paid out. 

Why is cash flow management important? 

Cash flow management helps business owners make well-informed money decisions. Knowing your projected net balances will help you budget for future hiring, new marketing campaigns, geographic expansions, and more.  

It’s important to project your cash flow as far into the future as possible — ideally six months to a year — so you can make strategic, long-term investments while knowing you’ll have enough money to cover expenses.

Small-business cash flow management

According to an analysis by QuickBooks, 80% of small-business owners worry about cash flow.  Many small businesses have thin cash buffers, making them especially vulnerable to cash flow issues and business volatilities. Here are a few cash flow management strategies for small-business owners to keep in mind:

Collect receivables promptly. 

Offering short-term credit to customers in the form of net-30 or net-60 payment terms can create a cash flow bind for your business. Consider asking for payment within 7 or 15 days, offering discounts to customers who pay early, and charging late fees if invoices aren’t paid on time.

Make it easy for customers to pay you. 

Customers might put off paying if your payment system isn’t convenient. Make it easy for people to pay you — and for you to bill customers — by using invoicing software like FreshBooks, Zoho Invoice, Vcita, or QuickBooks. Make sure the system you choose has a solid user interface.

Pay bills strategically.

Paying bills all at once can drain your cash on hand. Instead, sort bills from most important (e.g., payroll and rent) to least important, and get to the most important bills first. Stagger the rest of your bills throughout the month and consider waiting to pay bills that have more generous payment terms.

Cash flow management strategies

Implementing good cash flow management practices from the start, and committing to keeping up with your system, will help put your business on good financial footing. Top tips from entrepreneurs in our Trends group include:

Have a cash flow spreadsheet, and update and refer to it often

Use some type of spreadsheet system to effectively manage your cash flow. You can update this spreadsheet yourself or hire someone else to do it, but make sure it gets updated frequently and that you refer to it often. 

At the most basic level, the document should include your cash receipts and the money you’re paying out, separated by category (e.g., payroll, rent, advertising, etc.). Here are a few templates from Smartsheet that should help you get started.

Dan Myers, who owns a gaming company, is “obsessed” with his cash flow document and painstakingly goes through every line item himself. “It keeps you from overspending on things you don’t need,” Myers says.

If diving into spreadsheets isn’t your thing, hire someone to maintain this document. Kendall Bachman, CEO of a software firm and an investment group, suggests finding a financial expert who understands you and your business, meeting with this person weekly, and not skimping on the costs. 

“In the early days it’s really tempting to take the lowest price possible for keeping good books,” Bachman says. “But good enough books to do your taxes often doesn’t equal good enough books to make good choices.” 

Several of the founders in Trends recommended using QuickBooks for bookkeeping, noting that the program’s API integration is solid. They also stressed the importance of using descriptive spend categories and applying them consistently.

Be conservative with sales projections

“My biggest piece of advice is lean to the conservative side on your projections,” says Zachary McClung, founder of TaskHusky.com. 

If you set up a master budget based on sales projections you fall short of, you’re more vulnerable to becoming cash flow negative. Many things can go wrong to knock your projection off course; being conservative ensures your business is prepared for contingencies. 

Align your spending and priorities 

It’s important to develop a clear business plan to nail down your key offerings, as well as your sales and marketing strategy. Make sure the cash flowing through your company aligns with your business goals.

A good way to optimize cash flow is to review your monthly expenses and see if there’s anything superfluous that you could cut. Businesses often spend money on stuff that isn’t “mission critical.” Try to only spend on items that help achieve your top priorities.

Aligning your money with your goals also helps grow your core business. In the early days of her social enterprise, Monisha Bajaj and her team were working on many initiatives while trying to conserve cash. This meant lots of work hours, but progress toward their goals felt slow, she says. 

Bajaj changed to focusing and investing more in one core program: “We started to see a return and grow more because we were putting all our resources to work.” 

Optimize your expenses

If you’re closely tracking your cash flow, you can take advantage of discounts knowing you’re going to have enough money in the bank to cover your expenses. For example, it’s usually cheaper to pay for yearly subscriptions upfront versus paying monthly.

“You should be constantly going, OK, how can I improve?,’” Myers says. “How can I get more from my advertising for less? How can I get better deals on my inventory, payment terms, and currency exchange rates?”

Consider financing options

You might still be in a cash crunch after optimizing your expenses. If that’s the case, consider closing the gap with debt financing, equity financing, and/or a line of credit.

Debt financing involves receiving a loan or line of credit from an investor or institution, to be paid back with interest.

Equity financing requires you to sell a portion of your company to an investor in exchange for funding. 

And a 0% interest credit card is a line of credit that tends to be particularly helpful for small-business owners. But be aware that the 0% interest deal only lasts for a set time period, usually no longer than 9-20 months.

Cash flow management example

If you’re scratching your head and wondering what a cash flow equation looks like, here’s a year-end summary from Myers’ gaming company, That’s What She Said Inc.:

cash flow management example

Source: Dan Myers, That’s What She Said Inc. 

A year-end cash flow summary should list out cumulative sales minus all expense categories, such as labor, cost of goods, and advertising expenses. You can determine your company’s annual net change in cash balance by subtracting all expenses from net sales in a given year.

Keeping up with a monthly cash flow spreadsheet can help ensure that your company has an acceptable cash balance at the end of each month and year. A monthly cash flow spreadsheet should show:

(1) Cash on hand at the beginning of the month, plus 

(2) Receipts (sales) expected to hit your account that month, minus 

(3) All the cash you plan to pay out that month, broken out by category such as gross wages, operating expenses, manufacturing expenses, loan payments, etc.

Bottom line: Have a cash flow document, project it out as far as possible, update it frequently, and refer to it when making business decisions. While a well-maintained spreadsheet might not sound sexy, it’s the backbone of a financially well-informed company. 

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