What Is the Best Way to Manage Small Business Cash Flow?

What Is Small Business Cash Flow?

Cash flow is the movement of money into and out of your business over a particular period. Money coming into your business may include:

• Customer payments
• Product or service sales
• Loan proceeds
• Other business income
• Money going out may include:
• Payroll
• Rent or mortgage payments
• Inventory
• Utilities
• Taxes
• Loan payments
• Insurance
• Supplies and equipment

Positive cash flow generally means more money is coming into the business than going out, while negative cash flow means the opposite. That's why watching your bank balance alone isn't enough to understand your business's financial position.

1. Track Your Cash Flow Regularly

Understanding exactly where money comes from and where it goes is the foundation of good cash flow management. Depending on your business, you may want to pay particularly close attention to:

• Current cash balance
• Outstanding invoices
• Upcoming bills
• Payroll
• Debt payments
• Seasonal expenses
• Large planned purchases

Regular monitoring makes it easier to identify potential cash shortages before they become urgent.

2. Build a Cash Flow Forecast

Knowing what happened last month is helpful. Knowing what could happen next month can be even more valuable. A cash flow forecast estimates the money you expect to receive and the expenses you anticipate paying during a future period.

Your forecast might consider:

• Expected sales
• Accounts receivable
• Payroll
• Recurring operating expenses
• Debt payments
• Taxes
• Inventory purchases
• Planned capital investments
• Seasonal changes in revenue

What is a cash flow forecast?

A cash flow forecast estimates how much money you expect to come into and leave your business during a future period. It can help identify potential shortfalls before they occur.

3. Encourage Customers to Pay on Time

Strong sales don't necessarily create healthy cash flow if you're waiting too long to get paid. Consider your entire accounts receivable process, including:

• When invoices are sent
• How clearly payment terms are communicated
• How overdue invoices are handled
• Whether electronic payment options are available
• How frequently outstanding receivables are reviewed

The goal is straightforward: reduce unnecessary delays between earning revenue and receiving the money.

4. Manage the Timing of Business Expenses

Managing cash flow doesn't simply mean cutting expenses. It means understanding when expenses occur and how they align with incoming cash. Review your expenses and identify which are:

Fixed expenses:
Costs that are relatively consistent, such as rent or certain insurance costs.

Variable expenses:
Costs that may change based on sales or operations.

Occasional expenses:
Larger or less frequent costs, such as equipment purchases or technology investments.

Understanding these categories can help you anticipate periods when more cash may be leaving your business than usual.

5. Build a Business Cash Reserve

Unexpected expenses happen.

A major equipment repair, slower-than-expected sales, delayed payments, or another business disruption can quickly put pressure on cash flow.

Maintaining a business cash reserve can provide additional flexibility when the unexpected occurs. Consider keeping reserve funds separate from your everyday operating account so it's easier to distinguish between money available for regular expenses and money designated for unexpected needs.

6. Prepare for Seasonal Changes

For many businesses, cash flow isn't consistent throughout the year. A retailer may generate more revenue during the holidays, while another business might experience its strongest sales during spring or summer.

If your business experiences seasonal fluctuations, look at historical activity to identify patterns, ask:

• When are sales typically strongest?
• When do they slow down?
• When are the largest expenses due?
• Do inventory needs increase before peak season?
• How much cash may be needed to get through the slower months?

Planning ahead can make seasonal swings more manageable.

7. Keep Business and Personal Finances Separate

Separate business banking accounts can make it easier to understand your company's true financial position. Consider using dedicated accounts for:

• Everyday business operations
• Business savings
• Tax reserves
• Other specific financial goals

Clear separation also makes it easier to track revenue and expenses and maintain accurate financial records.

8. Use Business Financing Strategically

Business financing may be useful when there's a mismatch between the timing of expenses and incoming revenue. Depending on a business's needs, financing options could include a business loan or line of credit.

The important point is to plan before there's an urgent cash shortage.Talk with your credit union about available financing options, costs, repayment terms, and whether borrowing makes sense for your specific situation.

9. Review Your Cash Flow Strategy Regularly

Cash flow management isn't something you do once and forget. Your business may change as you:

• Add employees
• Enter new markets
• Increase inventory
• Purchase equipment
• Introduce new products
• Take on financing
• Experience seasonal changes

Reviewing financial information regularly can help a business make more proactive decisions.

How Can You Improve Small Business Cash Flow?

If cash is consistently tight, start by looking at both sides of the equation.

Money coming in

Consider whether you can:

• Improve your invoicing process
• Follow up consistently on outstanding payments
• Review customer payment terms
• Better anticipate seasonal sales

Money going out

Look for opportunities to:

• Review recurring expenses
• Plan major purchases carefully
• Anticipate upcoming bills
• Align spending with expected revenue
• Avoid unnecessary expenses

Small adjustments across several areas may create a more sustainable cash flow strategy than relying on one major change.

Frequently Asked Questions About Small Business Cash Flow

What is the best way to manage cash flow for a small business?

Start by consistently tracking money coming in and going out, creating cash flow forecasts, monitoring outstanding payments, planning expenses, maintaining appropriate cash reserves, and preparing for periods when cash may be tighter.

How often should a small business review cash flow?

There's no single schedule that works for every business. As a practical recommendation, review cash flow frequently enough to catch potential problems before bills are due. Businesses with tight margins, seasonal revenue, or rapidly changing expenses may benefit from more frequent monitoring.

Can a business line of credit help with cash flow?

A line of credit may be one option for addressing certain short-term cash needs. Whether it is appropriate depends on the business's financial situation, borrowing costs, terms, and ability to repay.

How much cash should a small business keep in reserve?

There isn't one amount that's appropriate for every company. A business's reserve needs depend on factors such as operating costs, revenue consistency, seasonality, financial obligations, and risk. Consider working with your financial professional to establish a reserve goal appropriate for your business.

Plan Ahead for Healthier Business Cash Flow

Managing cash flow doesn't have to mean constantly reacting to the latest bill or waiting for the next customer payment.

Tracking your finances, planning ahead, maintaining reserves, and understanding your borrowing options can help you make more informed business decisions.

Your credit union can be a resource along the way. Whether you're looking for a business checking or savings account or exploring financing solutions, working with a financial partner who understands your business can help you evaluate options that align with your goals.