How to manage your cash flow

Cash flow is the lifeblood of any small business. No matter how great your product or how strong your sales, without enough cash on hand to cover expenses, your business can quickly run into trouble. 

Managing cash flow effectively means knowing where your money is coming from, where it’s going and ensuring you have enough available to keep operations running smoothly. 

This guide explains how to monitor, improve and maintain a healthy cash flow.

Key takeaways

• Cash flow shows the real-time movement of money in and out of your business

• Keeping track of your cash flow helps you cover day-to-day costs and plan for the future

• Your business may need to improve cash flow if it’s struggling to pay bills or has no cash to expand

• Creating regular cash flow forecasts enables you to anticipate potential gaps in funding

• Building a cash reserve allows you to handle unexpected expenses and stay resilient

What is cash flow?

Cash flow is the movement of money into and out of a business over a specific period. It shows how much cash is available to pay bills, invest or save.

When your cash flow is positive, more money is entering your business than going out, and you should be able to meet your financial obligations without any problems.

But when cash flow is negative, more money is leaving your business than coming in. This can make it more challenging to pay essential bills and other expenses. 

Why is managing cash flow important to your business?

Managing cash flow is crucial because it ensures you have the necessary money to operate day to day and grow in the long term. Without cash flow, your business can’t survive.

By monitoring your cash flow, you gain a clear picture of how much money is available to cover rent, bills, supplier payments and other expenses, helping you avoid unexpected shortfalls and stay afloat. 

It also gives you the insight needed to make smart financial decisions, such as when to invest in growth, reduce spending or secure additional funding. 

Positive cash flow can help build your business credit rating, making it easier to access financing, such as business loans or business credit cards, when needed.

Signs that you need to improve cash flow

If you recognise any of the signs below, you may need to take steps to boost your cash flow:

• You’re finding it difficult to pay your bills on time

• You’re relying on credit to cover daily expenses 

• You’ve got too much cash tied up in unsold inventory

• You don’t have an accurate cash flow forecast

• Your business has been trading for a few years, but you have no cash to expand 

Strategies for managing and improving cash flow

There are lots of ways you can manage and improve your cash flow as a small business:

1. Separate personal and business finances

Managing cash flow effectively starts with keeping your business and personal finances separate. This helps you form a clear and accurate picture of how your business is performing financially, making it easier to track income, expenses and overall cash flow. 

A good first step is to open a business bank account for all your business transactions. 

2. Get better at forecasting

A cash flow forecast is a document that estimates the amount of money you expect to flow in and out of your business over a specific period – usually weekly, monthly or quarterly.

It helps you anticipate potential cash shortfalls, making it easier to decide if you need to cut overhead costs or seek additional funding, for example.

To create a cash flow forecast, list all expected income and expenses, then calculate your net cash balance.

If the balance is negative, it may be harder to cover bills. Spotting this early means you can take action to ensure you have enough cash to cover expenses. Reviewing past data can also help identify patterns and anticipate future shortfalls.

3. Invoice promptly

The sooner you invoice, the sooner your customers should pay you, giving you more cash to work with. Send invoices immediately after delivering goods and services, and set clear payment terms. You might even want to offer discounts to those who pay early. 

Providing multiple online payment options makes it easier for clients to pay, which can lead to faster payments. Invoicing software can also automate reminders and track payments for you, saving time and reducing stress.

4. Manage inventory 

Don’t overstock. Inventory ties up cash that you could use elsewhere, so employ inventory management systems to track what sells and what doesn’t. If you can’t shift certain products, you may need to lower their price to get rid of them. 

5. Use technology

There’s a raft of accounting tools and software you can use to help you stay on track and manage cash flow. Examples include QuickBooks, Xero and Sage. These can help you forecast cash flow, spot patterns and make projections. 

You might also want to consider hiring an accountant to offer additional support. 

6. Regularly review your spending

It’s essential to keep a close eye on what you’re spending each month. This not only helps you stay in control of expenses but also makes it easier to distinguish between operating, investing and financing cash flows. As your business grows, your expenses are likely to increase, too, so it’s important to plan ahead to ensure your income continues to exceed your outgoings. 

As part of this process, you can identify areas where you might be able to make cutbacks and save money. For example, you might be able to switch to a cheaper energy supplier or downsize to a smaller office space. 

7. Build a cash reserve

Aim to gradually build a cash reserve, so you have a financial buffer to handle any unexpected costs and emergencies. This gives your business greater stability and reduces the need to rely on short-term cash flow finance. Even if you only set aside a small sum each month, this can make a big difference over time. 

What’s the difference between cash flow and profit?

It can be easy to confuse cash flow and profit, but they measure very different things.

Cash flow is the movement of money in and out of your business and is a better way of indicating the overall health of your business. Profit, on the other hand, focuses on the amount of money you have left over once you’ve subtracted your expenses from your business revenue. 

You can be profitable but have poor cash flow if you’ve got too much money tied up in unpaid invoices. Equally, a business can have good cash flow but remain unprofitable if it’s using a lot of that cash to repay loans.