Managing cash flow can be a big challenge for small business owners. Cash flow management is the process of tracking the inflows and outflows of money to maintain a positive cash inflow.

Cash flow is essential for the survival and growth of a business. It is crucial to know how to keep track of money spent and earned to keep profitable and put money aside for scaling up and rainy days.

Money is the life of your enterprise. Mismanaging cash flow can result in some serious consequences such as not paying your staff, unpaid bills and in the worst case bankruptcy.

However, managing your cash flow can be done easily and is essential to being a business owner.

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Our Tips to Manage Cash Flow

Calculating Profit

Before you start, it's important to understand the difference between revenue and profits. Revenue is all the money coming into your business i.e. from sales or investors. Profits are the money you are left with after all expenses (costs) are removed. Simply put Profit = Revenue - Costs. In managing your cash flow you want to make sure your profits are always positive, this is by ensuring your revenue is greater than your costs. 

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Forecasting Cash Flow 

Making frequent cash flow projections is crucial to your business’ well-being, it can notify you of any issues before they arise. Try and make a forecast for every quarter. However, in your first year, you may benefit from a monthly forecast to keep a close eye on your finances. 

How to Make Cash Flow Forecast 

First, you must decide on a forecasting period, whether monthly or quarterly. To forecast sales, start by looking at last year’s sales and spot any trends. You can then make adjustments depending on the volume of sales you expect to have this year.

If you are a new business with no previous sales, start by estimating your cash outflow (how much you’ll spend) then you know how much you need to earn to break even or turn a profit.

You’ll also need to account for future costs such as a rise in the cost of your materials or salary increases for your staff.

Remember to factor in clients and their habits for payment. Some clients may pay late which can through your forecast off. 

Establishing Payment Terms with Clients 

To ensure you have a healthy cash flow, you need to be paid on time by those using your products and services.

You may want to consider late payment fees for large orders. This is an effective way to lower the amount of late payments and gives you added compensation for the disruption caused by late payments.

Another way to help make sure your revenue is on time is by offering incentives for early or on-time payments. Many businesses have an annual fee where they offer small discounts to incentivise a one-off payment. If your business is not service-led you can incentivise by offering freebies or another value-add for early payments.

If the cost of your raw materials is high, a deposit can help you maintain a healthy cash flow and protect you in cases of late or missed payments. For example, if you own a custom cake business, you may spend a lot of money on ingredients and equipment and if your client pays you on completion you may have a negative cash flow for a few days. By asking for a deposit you can cover the cost of your materials and cover yourself in case the customer is a no-show. 

Manage your Inventory 

Too much inventory can be a huge drain on your cash flow. Make sure to use an inventory management system to make sure you buy just the right amount of stock.

If you bulk buy a lot of stock regularly try and negotiate with your supplier for better rates or a corporate discount. Secondly, get creative about selling slow-moving stock or excess stock. For example, you can offer a promotion on hard-to-sell products or create things like a ‘mystery bag’ to shift inventory.

In the beginning, try to buy only what you need, this can help you manage your inventory from the onset.

Manage Expenses

An easy way to keep a positive cash flow is by keeping your expenses low. However, there is a fine line between keeping costs low and your product/service high quality. Therefore, when you are reviewing where to cut costs, be sure that the effect of this will not disrupt the product or service you are delivering. For example, if you own and operate an accountancy business you may cut costs by choosing a cheaper software. This could help you save a few pounds every month, however, if the software is hard to use, glitchy or ineffective this can cost you both good clients and competent staff.

Carefully consider which of your expenses you can afford to scale down or back. As an accountant, the software may be crucial to your business but is an expensive office space or personalised merch for staff needed?

When your business can sustain higher rental costs or added staff perks you can always bring them back. However, while the company is being conservative with its cash flow certain tough decisions must be made. 

Digitise your Business 

Another way to manage cash flow is by using software to keep track of your cash in and out. This can minimise mistakes and save you time in the long run. It can also help with invoicing and pending costs. Which can help with more accurate forecasting and insight into spending trends.

Digitising is an effective way to save time and while the software may seem like an added cost, ultimately fewer mistakes and a better insight into your cash flow will save time and money. 
 

Keeping on top of Your Cash Flow

Cash flow forecasting is never ‘finished’. You must regularly re-visit and update your forecast, and keep on top of all cash flows in and out to make sure your company is in the green.

Secondly, make sure to put money aside for a rainy day, keeping a cash reserve will allow you the freedom to take a few risks or cover unexpected expenses like a sudden rise in interest rates.

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