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 7 steps to implementing a proven small business cash flow strategy

Regardless of the size or age of your SMB, understanding cash flow management strategies for small business is critical to your overall success.

Said simply, small business cash flow management is the process of monitoring, tweaking, and optimising the payments and income of your business.

Despite its simple explanation, small business cash flow management is much easier said than done. It may take years of work for an inexperienced person to accomplish cash flow forecasting correctly, or just a few weeks with the help of professional CFOs.

Today’s most successful SMBs follow seven cash flow management strategies for small business:

  1. Getting customers to pay invoices (and on time)
  2. Adopting subscription sales
  3. Seeking better payment terms from suppliers and banks
  4. Documenting all business income and expenses
  5. Reducing expenses
  6. Paying vendors and bills at the right time
  7. Increasing prices

When managing a small business there’s generally five key areas to focus on. But as your small business grows, it can become increasingly more difficult to stay on top of your finances. Often, it’s not until later that you realise your business is actually spending more than it’s making.

This scenario is a nightmare for every small business owner. Cash flow is the lifeblood of every business, so spending more than you make can have a tremendous impact on operations and finances, especially for small businesses.

That’s why small business cash flow management is crucial to your business’ success.

But how can you make sure that there’s always more cash coming in, when you know that there are expenses necessary to keep your business going?

The solution? Accelerate the flow of incoming money, and delay the flow of outgoing cash.

Having a chief financial officer (CFO) or a virtual CFO will definitely help you achieve this, but it’s also a great idea to have a better understanding on how to solve small business cash flow problems on your own.

We’ll guide you on what you can do to improve your cash flow, but first, it’s important to know what cash flow actually is and why its importance to your business.

What is small business cash flow?

Cash flow is the amount of money flowing into and going out of a small business’s accounts.

As mentioned earlier, cash flow is your small business’ lifeblood. So if your cash flow is poor (i.e. your expenses exceed your income), that means that your small business is “sick”.

That said, having positive cash flow doesn’t necessarily mean that your business is profitable. However, it does indicate your business’ liquidity.

The more liquid your business is, the more financially capable it is to apply for a loan, pay off short term liabilities, debts, and unexpected expenses (e.g. due to unplanned events, economic downturns, etc). It also means you can more easily reinvest in your business and return money to its shareholders.

How does cash flow affect small businesses?

If a small business is operating with positive cash flow it opens them up to emerging opportunities that may otherwise be missed with negative cash flow, or keeps cash free for unexpected events and situations.

As an example, if you’re a small business utilising heavy-machinery on a factory floor, positive cash flow means machines can be fixed efficiently, without a great loss to productivity if they break. But if cash flow is negative, there may be no reserve funds to cover the expenses of broken equipment.

Any breakdown in operating processes – no matter the small business – will result in delays to delivering your products or services to your customers. To make up the shortfall, you might have to pay overhead and suppliers from your own back pocket.

How can cash flow help a business grow?

Positive cash flow isn’t just to safeguard your small business, it can actually be used to help it grow.

Whether you want to tap into a new market, hire more staff, open an office in another location or boost your marketing initiatives, cash flow solutions for small business can be used to take your small business to the next level.

With positive cash flow the options are endless.

HOW TO MANAGE cash flow in small business?

Cash flow is important to any business, but having negative cash flow often hits small businesses more than bigger, more established companies.

When starting a business, you have a lot of expenses and you’ll find that money is going out fast, while getting sales might initially be slower than anticipated.

Unfortunately, this is a common reason why many emerging businesses fail. That’s why the first six months of a business is a very crucial period, where you need to ensure that you’re managing your cash flow well.

If you’re cash-flow negative for too long, it will spell danger for the future of your small business.

Other dangers of mishandled cash flow in the early stages may include:

  • Profit bleed — Mishandled small business cash flow management prevents businesses from achieving their sales and profit targets.
  • Less liquidity — If a large amount of cash is tied up in less liquid materials, it may be harder to source financing or funding from third parties.
  • Business failure — Bad small business cash flow management equals bad business operations – and potential closure in the near future.

Thankfully, a poor cash flow process doesn’t necessarily doom a business to failure. With the right cash flow management strategies for small business, you and your business may be financially successful for years to come.

How much cash flow should a business have?

According to CB Insights, 30% of businesses fail because they run out of money and 60% of small business owners feel they don’t know enough about accounting or finance.

So given that cash flow is crucial for every business, it’s important to understand how to evaluate your small business cash flow.

A Cash Flow Forecast will tell you how much cash you should have.

When this process is completed by CFO services for professional industries, it may remove a large portion of the guesswork from cash flow management strategies for small business.

Cash flow strategies for small business

Keeping your small business cash flow positive is a challenge, hence it’s important to analyse and plan around your current cash flow and your cash flow goals.

But in order to have a solid strategy, you need to have a clear idea on what should be included in the plan. So, here are seven concrete ways to help you improve your small business cash flow:

1.   Get customers to pay invoices on time

Be assertive when reminding your customers of payment. It is their responsibility to pay on time, but if poor collection processes are in place payments can be delayed by up to 120 days – that’s a cash flow killer for your small business.

There’s nothing wrong with you sending an email or calling to gently remind them of the deadline. One way to encourage them to pay on time is to incentivise quick payment through discounts (you need to be careful this doesn’t erode too much profit). Another way is to penalise late payers with interest penalties.

2.   Look into adopting subscription sales

If your product or service is being used and repurchased regularly by your customer, apply a subscription program so you’re sure that you get paid periodically (e.g monthly).

Aside from receiving upfront cash for future costs, subscription sales secure future sales, making it easier to accurately forecast your income and therefore your cash flow.

3.   Seek better payment terms from suppliers

Having better credit terms means that you don’t need to borrow as much money with interest. Also push for payment terms of 60-90 days rather than 30 days to slow down your cash outflow.

4.   Document all business income and expense streams

Make sure all your income sources and expenses are well-documented in an organised manner. You can’t accurately compute your cash flow if your data is lacking.

Having accurate data will also help you better analyse where your money is going, which in turn will help you predict or estimate future expenses more clearly.

5.   Reduce expenses

There are a lot of products and services that may hypothetically appear to be useful for your business. But, sometimes, that’s the urge to get something new and ‘flashy’ kicking in.

Before you make a purchase, think about whether your business really needs it. If it doesn’t, don’t buy it.

Also, if you need to purchase something, take the time to look for the best deals where you  get great quality and quantity for a low price.

Choosing used equipment (as long as it’s in good condition of course) over something brand new is also a good money saver.

6.   Pay vendors and bills at the right time

Often suppliers will try and get you to pay before the agreed terms, but this is not good for your cash flow. Don’t pay early unless you’re offered incentives to do so, such as a discount.

Paying right on time will ensure that you always have cash on hand, and it will help properly track the outflow of cash and maintain cash flow balance.

7.    Increase prices

If you’re really struggling to make your small business cash flow positive, it might be time to slightly increase your prices. Many businesses fail to do this and it leads to margin squeeze (i.e. falling profitability over a period of time).

But with some extra ‘knowhow’ big financial gains can be made by increasing prices. A manufacturing customer increased their bottom line by up to $200,000 simply by accurately accounting for the ‘scrap’ of raw materials and reflecting in their pricing.

So when increasing your prices, consider your competitors, the increasing prices of your equipment/inventory, the amount of manpower needed to produce your products/services, the amount of time needed to deliver these products/services, and whether your products come off as cheap or valuable.

How can a Virtual CFO help improve your cash flow?

Having a CFO as your go-to financial manager is important if you want to solve your small business cash flow problems.

However, given the qualifications of a CFO and how much they can do for a business, they aren’t an affordable hire.

That’s why hiring a virtual CFO is a better alternative for small businesses. You only pay for their services and time rendered, so they become a much cheaper option.

Virtual CFOs deliver their services remotely and on a flexible schedule, so you don’t need to worry about paying for an extra office space or hiring someone full-time.

Having a healthy cash flow is crucial in order for small business to survive in the present and succeed in the future.

That’s why you need the right person to help you manage your finances every step of the way.


Struggling to fully understand cash flow and business financial management? Book a free “hour of power” call with one of our Virtual CFOs to learn more about CFO Services for Small Business.