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Effectively managing cash flow is vital to successfully running a small business, as the large majority fail due to cash crunches. As a finance professional and small business owner, I get it.

I’m sharing six small business strategies to improve cash flow, including understanding cash flow statements, optimizing key accounting processes, negotiating terms with suppliers, and other cost-cutting strategies.

What Is Cash Flow?

Cash flow refers to the total amount of cash coming into a company from its revenue-making activities, minus the total paid out due to expenses. 

The goal of all businesses is to get and remain cash flow positive, which means more money is coming in than is being paid out.

What You Need to Manage Cash Flow

Successfully managing your cash flow for improved financial stability requires these necessary ingredients.

  • Understanding cash flow sources
  • A cash flow statement
  • Cash management formulas
  • Cash management software

With these, you can report and improve the cash flow, conduct a more thorough cash flow analysis, interpret the results, and confidently make decisions. 

Cash Flow Sources

The primary sources of small business cash are operating revenues, investment income, and financing activities (such as bank loans). These forms of cash flow play a crucial role in maintaining your business's financial health and resilience.

Cash Flow Statement

A cash flow statement is a financial document that identifies your business’s sources and uses of cash. It details key forms of cash flow from operating, investing, and financing activities. Here’s what each one is composed of:

  • Operating Cash Flow = Net Income + Non-Cash Expenses + Changes in Working Capital
  • Investing Cash Flow = Cash Inflows from Investment Activities - Cash Outflows for Investment Activities
  • Financing Cash Flow = Cash Inflows from Financing Activities - Cash Outflows for Financing Activities

This helps you monitor and improve your company’s cash flow and make more informed decisions faster.

Cash Management Formulas

Knowing how much discretionary cash you have available—aka your Free Cash Flow (FCF)—is vital. It’s a key indicator of a company's financial flexibility and knowing whether your company is heading toward feast or famine—or already there. 

If you’re looking to determine what future cash flows are worth today—use the discounted cash flow (DCF) model.

Cash Flow Management Software

Cash flow management software automates the entire cash management process and is often part of a robust suite of tools in the broader CFO tech stack

This software helps you track and manage all of your company’s sources and timing of cash flow in one place, in real-time. You get a quick at-a-glance view of your cash position at any given time so you can make rapid and reliable decisions with available cash.

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Who’s Involved in Cash Flow Management?

How you manage your company’s cash flow impacts everyone related to the business, but it especially impacts a few choice stakeholders, including:

Department Heads

Cash flow management impacts the money available to all departments. Leaders in each department need to provide input into the short-term and long-term costs they expect to incur and the revenues they anticipate. This ensures cash flows are accurately forecast without surprises.

Executives

Executives often have to answer tough questions about financial health with investors, banks, and other stakeholders. Knowing the cash flow position at any given time helps key stakeholders feel confident in executives and, in turn, helps executives gain a sense of trust in your cash flow management capabilities.

Banks and Investors

Cash flow is a key metric for banks and investors alike. It tells them how well your company maintains its liquidity and overall financial health. 

In a larger business, it also lets them know how much cash is available for paying dividends, buying back shares, or expanding business operations. 

Suppliers and Vendors

Suppliers or vendors typically offer preferred discounts or favorable terms to financially strong companies. A positive cash flow position allows your company to seize opportunities that other companies may not have access to, further strengthening your financial position and fueling growth.

5 Strategies To Improve Cash Flow

If you’re looking for ways to improve cash flow, I have six strategies to for you to start trying.  

  1. Optimize AR & AP Processes
  2. Tighter Inventory Management
  3. Reduce Total Number of Vendors
  4. Conduct Expense Management
  5. Leverage Technology & Automation

1. Optimize AR & AP Processes

One key area where small businesses often struggle with cash flow is accounts receivable and accounts payable. Late receivables create cash flow gaps, and delayed payments to suppliers and vendors strain relationships and potentially lead to higher operating costs. 

Optimizing these processes can improve cash flow and maintain healthy relationships with both your customers and suppliers.

Accounts Receivable

Implementing a clear and efficient invoicing system can optimize your accounts receivable process. 

  1. Ensure that your invoices are accurate and easy to understand. 
  2. Send out invoices promptly and follow up on any outstanding invoices and overdue payments. 
  3. Offer incentives for early payment or, conversely, implement a late payment fee policy.

Accounts Payable

Negotiate favorable payment terms with your suppliers upfront on the accounts payable side. Request extended due dates or payment terms, or explore the possibility of installment payments. 

For example, you might trade in high-interest-rate business credit cards and look for different payment options that lower interest rates, such as lower-interest-rate credit cards to pay bills, business loans, or lines of credit. This can help you manage your cash flow by spreading out your expenses over a longer period. 

A review of your AR and AP processes should be done annually, if not more frequently.

2. Tighter Inventory Management

Assuming you have physical inventory, managing it will likely be the #1 stressor on your cash flow. 

Holding excessive inventory ties up working capital and increases carrying costs, whereas insufficient inventory can lead to missed sales opportunities. Finding the right balance is essential for optimizing cash flow. There are a few strategies I want to touch on here:

Get comfortable forecasting

Stocking out and holding too much inventory are borne out of the same issue: Uncertainty.

If you’re guessing what you’ll need in the future, you’ll constantly run up against the same issue here. If you start forecasting your future needs based on your past ones, you can break this cycle.

Hunt for a deal

Talk with your suppliers about the best ways to minimize inventory holding costs. Some vendors you have a good history with will be open to consignment arrangements, wherein the supplier retains ownership of the inventory until you sell it.

Now, this may not be everyone’s cup of tea, but looking for suppliers that are open to this will help you find good long-term partners, whilst freeing up cash for your business.

3. Reduce Total Number of Vendors

If you choose to deal with fewer suppliers, in greater volume, you can build stronger relationships and improve your cash flow management. After all, the first two items I suggested are going to be helped out massively by simply having better supplier relationships.

Outside of that, though, there’s a lot more you can do, including:

  • Explore volume discounts or bulk purchasing arrangements. 
  • Reduce leasing costs and bank account fees by reducing the number of transactions you have. 
  • Use your greater deal size as leverage for better terms.

Keep in mind that doing more business with them doesn’t entitle you to these things, so you’ll want to maintain open lines of communication and demonstrate your commitment to the partnership.

Many suppliers understand the challenges faced by small businesses and are willing to work with you to find a mutually beneficial solution.

4. Conduct Expense Management

Expense management is also known by another name: Cutting costs… which is often seen as a necessary evil in small businesses—but this shouldn’t mean compromising on quality or customer experience. 

You could start by conducting a thorough review of your expenditures. Identify areas where there may be overspending or where more cost-effective alternatives are available, then get to work: 

  • Renegotiating contracts with service providers
  • Finding alternative suppliers
  • Automating routine tasks
  • Upgrading to more efficient equipment
  • & more

When doing this, communicate with relevant stakeholders and involve them in the process to help foster a culture of cost-consciousness and ensure that everyone is on board with the changes.

5. Leverage Technology and Automation

I know, I know… Duh. But listen, as someone who’s led finance teams and implemented systems and process improvement initiatives, I am a huge fan of this one. There are so many areas of businesses where things have simply “always been done” a certain way. 

By paying attention to other companies around you, reading publications such as this one, and talking to peers, you can find new processes and techniques you had never considered before.

For example, natural language generation technology can automatically turn raw datasets into financial reports, thus freeing up your team to focus on bigger-ticket items such as, well, the rest of these strategies.

5 Mistakes To Avoid

It often takes more time and money to fix an avoidable mistake than to make the wrong business decision. Rough, I know.

Here are some mistakes small business owners make that end up being extremely expensive lessons learned in the end.

1. Bad Estimations

When it comes to money flowing in, be careful not to be overly optimistic. You might miss the mark by leaps and bounds—appearing as though you are unsure of your company’s revenues. Rather than understate your company’s revenue, plan for the worst and hope for the best. 

The exact opposite is true with costs. If costs are lower, your cash flow projections will look better. As with cash flow, be careful not to be extreme. It's more beneficial to overestimate costs and end up with more cash.

2. Playing Fast & Loose with Cash

Small business owners know all too well how often unexpected costs arise, or how opportunities can be missed due to low or no cash reserves. 

Maintaining a 3-6 month cash reserve can be the difference between riding out storms or closing the doors.

3. Lack of Forecasting

This is, sadly, another contributor to small business failures. Think of it like driving with a blindfold and hoping to arrive safely at your desired destination. It simply won’t get you anywhere but disaster. 

Forecast cash flows to avoid being blindsided by slow trickling revenues or unforeseen costs.

4. Ignoring Cash Flow Statement Warnings

This is even more common—and harmful—than not having a cash flow statement in the first place. 

Let me say it loudly for the people in the back: Ignorance is not bliss. Far from it.

It wastes time and resources while putting you on the path to failure. Remove blinders and skip costly mistakes that you should know about.

5. Working in Isolation

If you aren’t factoring in other stakeholders into your cash flow planning, you could be missing a significant cost or cash reserves that might completely skew your forecasts. During cash flow planning, bring key stakeholders from around your business into the conversation.

After all, if you could do this alone, you would… they’re here for a reason, so you should use them!

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Knowing is half the battle… but doing is much more important. Try these out, then let me know what worked best for you.

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Moira Alexander
By Moira Alexander

Moira Alexander is a recognized thought leader and the founder of PMWorld 360 Magazine and Lead-Her-Ship Group, a digital content marketing agency.

Leveraging her 17 years of experience in accounting, financial reporting, and financial systems implementation, Moira has written content for fintech businesses for over ten years and been named one of the top global female B2B content thought leaders and influencers.