Regarding finances, most small business owners only focus on earning revenue or making a profit. However, managing the cash flow is important in determining if your small business is financially stable.

Being a profitable business doesn’t automatically mean you can settle your bills, pay your suppliers, or cover your employees’ salaries.

For your small business to earn money while keeping the lights on, you should know how to manage your cash flow. This includes proper financial planning, forecasting, management of working capital, and knowing your financing options, to name a few.

Cash flow determines whether your current cash is enough to cover your expenses or if you have some extra you can invest back into your business. Failure to manage your cash flow can lead to poor decisions that could compromise your business’ survival.

This guide lists effective small business cash flow management so you won’t have to worry about keeping your business afloat.

Cash flow is the movement of funds in and out of your business. In simple terms, cash flows into your business when you earn money through sales or investments. Meanwhile, cash flows out when you spend money on your operations and other purchases.

Ideally, businesses should always have enough cash to pay for all their expenses. However, sometimes your business won’t make enough revenue to cover your bills, which leads to a negative cash flow.

Effective cash flow management means tracking how your money moves through all cycles in your business. This lets you see when investing, buying additional assets, or paying your debts is best. It also helps you plan and prevent cash issues, especially during the off-season.

Understanding your cash flow also helps you make sound business decisions. For example, taking on a big contract might not be wise if you won’t have enough working capital to finish it.

Unlike large companies, small businesses have limited options when it comes to financing. They also typically have less available cash and smaller allowance in their profit margins.

Because of these reasons, knowing how to manage your cash flow as a small business owner is more important than ever.

Managing your cash flow will help you make the right decisions to keep your business running. Here are some steps you can take:

The first step in cash flow management is understanding the current financial status of your business.

Start with tracking how much money you receive and spend in your business over a certain period. In this step, knowing the best bookkeeping practices and avoiding common mistakes can significantly help.

Once you’ve tracked your cash flow, you can create your cash flow statement (CFS). This document summarizes the different cash and cash equivalents that flows in and out of your business.

Your CFS also determines how financially sustainable your business is. It determines your business’ liquidity and whether the money you make is enough to fund your operations and settle your debts.

If your CFS shows a negative cash flow, don’t panic immediately. This doesn’t automatically mean that your business will go bankrupt - it could be that you have invested in an expansion or taken a major project that requires bigger working capital.

Either way, you should carefully analyze your CFS to identify gaps and create the appropriate plans to address them.

You should create a cash flow forecast using the data surrounding your cash flow.

Cash flow forecasting lets you predict the movement of your money in a future time frame. This will show you any cash shortages or surpluses you will have along the different cycles in your business.

To create your forecast, list your possible income and expenditures using historical data involving your sales, customer payments, and business expenses.

For your sales data, you should factor in your business' peak and low seasons. For example, you may have a lot of customers during Christmas and make only a few sales during the summer.

It also helps to consider the payment behavior of your customers. Typically, in businesses that sell services, customers may take some time to pay their dues after you invoiced them. Make sure to include these considerations in your forecast.

When projecting your expenses, include both fixed and variable costs. This includes operating expenses, supplier payments, and dues for any debts you have.

By forecasting your cash flow, you can determine patterns and see when you need to adjust or ask for financial assistance.

Creating your cash flow statements and forecasts can be confusing.

If you need help figuring out where to start, we recommend consulting professionals who can help you. Aside from creating your CFS and forecast, they can also provide insights on how you can best manage your cash flow.

Once you’ve delivered your goods or service, ensure you collect payment promptly to prevent any backlogs in your cash flow.

One way to do this is to have a better invoicing system. Review your current invoice payment terms and adjust them accordingly. You can set earlier deadlines for your clients or make sure you state your terms as clearly as possible.

Another tactic is to provide promos or discounts to incentivize clients to make early payments or pay in full. Doing so also helps build better client relationships.

Furthermore, implement a downpayment scheme to increase your capital for bigger projects. This will give your business the cash to finance the project as it goes along.

Highly recommended, too, is leveraging technology in your invoicing system. You can automate the way you send your invoices and client reminders. You can also set up an automatic billing system to charge your clients’ cards without hassle.

Providing multiple payment options, such as bank transfer, GCash or Maya payments, credit cards, and the like, will also streamline how you collect customer payments.

Sometimes, you may have to provide special terms for your clients. When this happens, assess their creditworthiness or ability to pay. You can check their payment history or see what other businesses say about them.

Before your cash flow turns red, you can plan by negotiating with your suppliers and vendors for better credit terms.

You can request changing your payment frequency and deadlines or discuss installment options. Depending on your business relationship with suppliers and vendors, they may grant these requests.

You can also automate your payments to your vendors or set up alerts for payment deadlines. This prevents you from forgetting your account payables and makes it easier to track cash flow.

When you buy inventory, your money becomes tied up until you sell these goods and convert them back to cash.

A problem in your cash flow arises when you fail to sell your inventory immediately since your money becomes stagnant. Accumulating too much supply can also mean additional costs for storage or, worse, spoilage of goods.

You should have a proper inventory management system to prevent cash flow issues. You can use technology to manage your inventory and create the necessary documentation efficiently.

Also, make sure that there is proper communication between your finance and supply teams. Together, they can determine how much inventory you should keep to meet customers’ demands and minimize costs.

If the business is going slow, conducting a sale or giving discounts can help you convert inventory to cash quickly. Just be cautious about always having sales as your customers may come to expect it.

Another essential step in managing your cash flow is setting the right prices for your goods or services.

You can set a certain percentage of profit you want to make per item. Compute how much it costs to produce, source, or sell the product, and add the profit you want to make.

You can also experiment to see how many customers are willing to pay for your goods at specific prices. With some math, you can compute the maximum possible profit when you price your product a certain amount.

Another way you can price what you’re selling is by comparing it to your competitors’ prices. Here, it’s essential to identify what sets your products apart and determine how to justify a cheaper or more expensive price.

Also, remember to adjust your prices according to the inflation. Although it may seem counterintuitive to raise prices, doing so is necessary, especially if the cost of producing your good becomes more expensive.

An alternative to raising prices is the shrinkflation strategy, where you reduce the product or quality of your goods and sell it at the same price. This may keep your profits intact but can lead to customer dissatisfaction. So, weigh the pros and cons first before going for this option.

Whichever you choose, ensure your pricing remains reasonable, especially for your target market.

Exploring financial assistance or lending options is also helpful if your cash flow becomes negative. You can use this to bridge temporary gaps, especially during quiet seasons.

With the rise of financial technology apps, many alternative or online lending services are now available. These are useful if you want to take a loan quickly and hassle-free.

However, these quick loans incur high interest, so read the terms properly before availing of one.

If you’re not crunched for time, you may opt for bank loans as they have lower interest, albeit a longer processing time. Visit and inquire with different banks to compare and see which would fit your need the best.

If you only need the extra funds for short-term expenses, you can choose to open a business line of credit instead. This is also perfect as a backup for any unexpected expenses.

Building a cash reserve for your business is a good practice in managing your cash flow. This is your business emergency fund and should ideally amount to three to six months’ expenses.

A cash reserve lets you weather any low points or losses in your business. This way, you can avoid taking on debts, closing parts of the company, or laying off employees.

You can also use your cash reserve to stay ahead in the business. With this fund, you can invest or expand your business when the right opportunity comes.

You must review the cash flow regularly even when you’ve developed the “perfect” strategy for managing your cash flow.

Mistakes can still happen when doing bookkeeping that can affect your cash balances. Setting up an automated bookkeeping system avoids these mistakes and lets you see the cash flow quickly and accurately.

Business circumstances and the economic market constantly fluctuate, so you should stay proactive and watch for possible cash flow issues.

Reevaluate your budgeting whenever necessary and change your business financial management as you see fit.

Ensuring your business is profitable while managing your cash flow simultaneously can be tricky - but they don’t have to be! Outsource the financial services needed to keep your business afloat.

OneCFO provides CFO-level insights and advice to help you grow and scale your business. We help your business strategize better with financial modeling, forecasting, budgeting, and reviews.

Moreover, we help small businesses like yours manage bookkeeping, tax, and payroll so you can focus better on running your business.

Contact us now to learn more!

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