How to Manage Cash Flow For Small Business

Cash flow management is a vital component in maintaining a healthy company. Knowing how to manage cash flow for your small business can positively impact your ability to accurately and strategically plan for your company’s future.

The following will help you improve your cash flow management, arming you with the skills you need to make the best decisions for your company.

What Is Cash Flow?

Your company’s cash flow is the net value of the inflow and outflow of your company’s money. Measuring cash flow provides an accurate account of your change in balance sheet accounts.

3 Main Types of Cash Flow

There are three main categories of cash flow: operating, investing, and financing. Learning to track and separate your inflow and outflow for each is crucial for making informed decisions about your spending.

1. Operating Cash Flow

Operating Cash Flow (OCF) is the measure of your company’s inflow and outflow relating directly to your core day-to-day operations: for instance, your lease, electricity, and payroll.
OCF is calculated using the following formula: Operating cash flows = net income + non-cash expenses (usually depreciation expenses) +/- changes in working capital

2. Investing Cash Flow

Your Investing Cash Flow deals with long-term assets, like buildings and properties you own. These are assets you intend to hold for an extended period.

3. Financing Cash Flow

The money you owe creditors is considered financing cash flow. Maintaining a healthy business means staying current on borrowed money.

What Is a Cash Flow Forecast?

A cash flow forecast uses your historical data to project a course for your future operations. Forecasting can help you decide whether to free up funds to expand your business or to prepare for a shortfall.

Positive and Negative Cash Flow

Positive cash flow means more money is coming into your business than outflow. A negative cash flow means the opposite: you’re spending more than what’s coming in.

You can repay debts or prepare for difficult financial times with a positive cash flow. A negative cash flow is a warning to make adjustments to prevent an extended shortfall.

What Is Cash Flow Management?

Cash flow management involves monitoring, analyzing, and adjusting your company’s spending and receiving to remain financially stable. Managing your cash flow allows you to recognize potential short-term problems or take advantage of strategic growth when you have enough liquidity.

How to Manage Cash Flow for Your Small Business

Cash flow management allows you to accurately plan and budget based on hard data. At Amplēo, we assist our clients in building out a 13-week cash flow forecast. This forecast helps them learn to track their spending and receiving in order to catch potential problems—before they become a problem.

For instance, if you have some customers that are slow to pay, this can lead to unexpected cash restraints. With the proper knowledge about your cash flow, you can avoid getting behind on your payments to your suppliers by borrowing from a line of credit, or postpone your growth strategy during lean months. Having this kind of foreknowledge helps you operate your business with certainty, making the best use of your resources and avoiding problems before they hinder your business.

Why Is It Important to Manage Your Cash Flow?

Managing your cash flow is essential for properly planning in the immediate and long term. It can help you prepare for a cash crunch by discovering potential problems early or signaling the strategic time to expand. Lenders often require a cash flow report to determine whether it’s safe for you to borrow from them.

Knowing your cash flow is particularly important when growing your small business. You must be cautious about every dollar you spend, especially when you have limited resources. Information is your best defense against uncertainty.

How to Improve Cash Flow Management: 5 Important Practices

Managing your cash flow means preparing for conditions before they have an unwanted impact on your business. The following elements of proper cash flow management will help you stay on top of your company’s spending.

1. Tracking Your Cash Flow

Managing your cash flow helps you hold to a budget. Proper management requires understanding where you’re spending and where your earnings are coming from.

2. Managing Your Accounts Receivable and Payable

Knowing your cash flow helps you detect past-due customers so you can send them a reminder. You may find you’re behind on paying a supplier, in which case you can arrange payments without a late fee.

3. Offering Incentives to Customers

To improve your cash flow, consider offering discounts to customers who pay their invoices early. You can also simplify the payment process by accepting credit cards, e-checks, or other digital forms of payment.

4. Using Cash Flow Forecasting to Your Advantage

You can make better-informed decisions about the future of your business when you have detailed information on the past. Use forecasting tools like software and a qualified financial consultant to plan accurately.

5. Maintaining Close Ties with Lenders

Companies—large or small—will go through times when cash flow is limited. Keep positive, open communication with your lenders in preparation for temporary shortfalls. It may take a short-term loan or a line of credit to survive a money crunch.

Amplēo Can Help You Stay On Top of Your Cash Flow

With Amplēo, you’ll learn to use data to your advantage with our 13-week cash flow forecast. Businesses make better decisions about spending, expanding, or planning for leaner times when they know exactly where they stand with their cash flow.

Get in touch to find out how we can help you manage cash flow in your business today.