Small Business Cash Flow Management: Why It’s Important and How to Deal With Problems

StrategyDriven Managing Your Finances Article | Small Business Cash Flow Management: Why It’s Important and How to Deal With ProblemsThe businesses that fail to manage cash flow effectively are often doomed to failure. Put simply, you need to have more cash coming in from sales than you have going out for expenses. Being able to pay your debts on time and ensuring you have enough reserves to cover all expenses is key to success. Read on to find out why cash flow is so important and how you can manage it effectively.

Why Is Cash Flow Important to a Small Business?

  • Business expansion – You can’t grow without having cash reserves on hand. Keep money set aside for opening new premises, buying new stock, and marketing to new clients
  • Manage emergencies – You never know when disaster might strike; having enough in the bank to cover emergency kit repair, economic downturns, and other unforeseen circumstances is vital
  • Cover debts and protect your business credit – Proper management of your cash receipts means you’ll always be able to pay your debts and suppliers on time. This means your business credit score will stay healthy and you won’t get trapped in a disastrous debt cycle
  • Negotiating power – Being able to pay suppliers upfront can often lead to more favorable terms and discounts. Plus, not needing to take out credit can give you more flexibility to negotiate

Common Small Business Cash Flow Problems

  • Not holding enough reserves – You should always aim to have cash in the bank to cover at least three to six months of expenses. Small businesses that fail to do this can get hammered by unforeseen costs, go into steep debt, and potentially close completely
  • Growing too fast – While this seems counterintuitive it’s actually incredibly common for new businesses. For example, you could take on 100 new orders in one week but won’t receive payment for these for at least 30 days. Meanwhile, you still need to cover the cost of those sales. Without adequate cash reserves, you’ll fail to meet your orders
  • Late payments – Almost every single small business, freelancer, and entrepreneur in America has faced the problem of late payments of invoices. You’ll almost certainly need to dip into cash reserves to cover costs until you get paid
  • Bad pricing – Sell your goods and services at too high a price and you’ll scare off customers; going too low can lead to business failure. Many brand new small businesses struggle to hit this balance and can find cash reserves taking a hit

Examples of Cash Flow Management Problems in Business

Let’s take a look at a typical cash flow statement to use as an example. Remember cash flows aren’t like your income or profit and loss statement. A cash flow simply records when cash goes in or out of your business for any reason. Any movements in red represent cash going out in our example below.

Cash flow from operations for XYZ Company
Net income $50,000
Additions to cash
Depreciation $4,000
Increase in accounts payable $3,000
Subtractions from cash
Increase in accounts receivable ($40,000)
Increase in inventory ($15,000)
Net cash from operations
Cash flow from Investing
Purchase of equipment ($3,000)
Cash flow from financing
Notes payable $1,500
Cash Flow at 31st August 20XX

Looking at XYZ’s performance it seems we have a clear victim of overtrading. With a huge increase in accounts receivable it looks like the organization has taken on a big order and has spent a significant sum of cash on inventory and equipment to fulfill it.

However, all of those sales have gone into accounts receivable, meaning it won’t receive this cash for at least a month or more. This leaves the company on dangerously low cash reserves of just $5,500 to cover any emergencies this month.

In addition, there’s always a risk that these clients come up short or pay late leaving a very risky $40,000 the company might not receive any time soon.

Plus, looking at the low increase in payables it seems like XYZ company is paying its debts on time or early. It might want to negotiate better payment terms to improve cash flow or it may even need to miss payments if cash runs out.

Finally, with the large purchase in inventory to cover the order at almost half the cost of sales, it suggests XYZ might be pricing its goods far too low and might want to up prices.

Effective Cash Flow Management Tips for Small Businesses

  1. Don’t be too lenient with customers – You’ll want to strike a balance between giving your clients enough time to pay but not being too charitable. Don’t be afraid to chase unpaid invoices and know you’ll always have the option to take formal action where necessary. If you’ve built a good relationship from the start with clients and suppliers this shouldn’t be much of an issue, though
  2. Build a cash reserve – Always try to put some of your profits aside each month into your emergency cash reserves. Having liquid cash on hand is absolutely essential for the survival of any small business. This should be around three to six month’s worth of your average expenses. You can use the rest of your cash to invest and grow
  3. Get good accounting software – The larger your business gets the more complicated the transactions become. If you’re still using simple spreadsheets it can be easy to lose track of invoices and payments. It’s almost always worth the extra cost to get a good piece of management software in to keep you on track
  4. Cash flow is more important than profit – Your business can show a profit on paper but if you don’t have the cash in the bank to back it up you could still end up failing. Liquid cash should always be your number one priority when managing any business. If you check your earnings against your break-even point, but money still feels tight, it’s likely you need to fix your cash flow
  5. Encourage early repayments – You’ll want your clients to pay you as soon as possible so you might want to put early repayment discounts on your invoices to encourage faster receipt of cash. Plus, if you have a large invoice it’s worth splitting it up over several payments to make it easier for customers to pay back and you’ll be guaranteed some cash every month
  6. Reduce or delay expenses – Conversely, while you want customers to pay quickly, you should be trying to extend your own payment deadlines as long as you can. Try to negotiate extensions where you can and opt for Net 30 vendors where possible. Plus, you should always be looking for ways to boost efficiency and decrease expenses
  7. Manage your inventory – If you run an e-commerce store or retail business that needs a lot of stock you’ll need to manage it carefully. Buying too much can mean your cash flow takes a hit while buying too little means you’ll struggle to fill orders. You might want to consider buying some stock management software to track seasonal variations and other fluctuations


While small business cash flow management might seem a little confusing at first, with a little time and effort you can really start to see where you can make some savings. If it’s not something you’re actively managing right now, we highly recommend making it your number one priority.

Those organizations that successfully manage cash flows are much more likely to succeed and turn a tidy profit. Remember to keep chasing your invoices, ensure you always have a healthy cash reserve, and reduce your expenses as much as you can.

Is Your Business Sinking? 12 Holes You Need To Plug

StrategyDriven Managing Your Finances Article |Failing Business|Is Your Business Sinking? 12 Holes You Need To PlugMany entrepreneurs become so invested in their struggle for success that they forget a crucial reality which is business failure. Startups tend to collapse, and only a minor portion of them manage to stay afloat after a few years. But business owners – thanks to their enthusiasm for innovation – ignore the fact that cash-flow can make or break a business. If your business encounters money problems, you’ll find yourself in a financial crunch. That’s when you need to make some tough decisions about your company’s commercial future for protecting your sinking business. Are you considering packing up due to monetary complications? Don’t! Just follow these simple checks and save your brainchild.

Cash-flow leaks you should fix

A failing business is every entrepreneur’s nightmare. Many business owners incline to surrender when faced with the possibility of a near-failure. Though some accept monetary impediments as another challenge to examine the effectiveness of their business strategy. These courageous individuals manage to anticipate when the next iceberg’s coming and save the Titanic with their careful calculations. How to become one of such individuals? Here are some simple tricks that’ll help you avoid sinking:

1. Review your finances

A quarterly review of your company’s cash flow can help you apprehend any financial threat in advance. It’ll also allow you to consider your income, net profit, and expenditures. Reviewing your expenses is probably the single most important technique that may prevent bankruptcy. Moreover, avoid reaching a decision impulsively. The intuition is unreliable; hence trust data-driven decision-making. Craft your budget carefully, and then faithfully stick to it.

2. Curb needless spending

Your marketing department is the lifeblood of the whole organization. Though spending money excessively on advertisements may lead to financial downfall. Failure to arrange promotional campaigns strategically is a money-leaking tactic. If you aren’t marketing to your niche, the money’s just going down the gutter! Also, don’t waste funds designing a custom website without premature marketing research. In short, there’s no need to spend on stuff your company doesn’t need.

3. Try online tools

Modern digital tools help business managers, freelancers, and even homeowners organize their finances effectively. It’s better to purchase cost-effective online accounting software with unlimited support and expert advice. It saves your time so you can focus on other important business matters. These tech tools also make communication and collaboration among colleagues easier. You can share documents and information to enhance productivity and diminish time-wastage.

4. Focus on what’s important

Building on the previous point, spend only on projects that are making your company profitable. When Jobs returned to Apple in 1997, he discontinued the Project Newton that drained $100 million from the company. And that’s just one of the failed products canceled by him besides the Pippin and the Cube. On the other hand, your company must focus only on money-making products/services. Don’t try to bring innovation when the project lacks interest among your target audience.

5. Cut extra costs

Eliminating all discretionary expenditures must be your topmost priority. Reduce anything that seems unnecessary or mere wastage of an almost-bankrupt company’s funds. No more summer holidays or birthday parties! But that’s just an easy decision. The most challenging choice is laying off hardened employees. But, if there’s no alternative available, firing your folks can be a cruel but inevitable policy. Also, consider lowering costs on office supplies or shipping expenditures.

6. Prioritize what to pay

Your payment options vary according to their respective importance. That’s why it’s necessary to prioritize which payment must be issued first and which can be delayed. Pay the vital obligations first, not clearing, which can collapse your business. For instance, paying your employees’ salary is essential because you can’t afford their departure from the company. Paying your vendors and suppliers is your next priority. Similarly, paying taxes should be on the top of your list of expenses.

7. Reshape your fiscal plan

Rethinking your entire cash-flow management can help you avoid bankruptcy and find methods to enhance your productivity. How to perform this action? Try SWOT (strengths, weaknesses, opportunities, and threats) analysis. It’ll provide you information required for strategic planning and identifying undisclosed holes you haven’t plugged in yet. You also discover marketable opportunities – internal/external – which you’ve failed to use for maximizing the company’s profitability.

8. Strengthen your networking

Networking shouldn’t be underestimated! It’s the life-support your company sometimes needs to survive obvious failure. Your connections come to your assistance and bail you out when the ship’s sinking. Your associates help enhance business awareness and finding better clients for your organization. Make friends not just with shareholders but also with your customers. Utilize promotional gifts (pens, purses, or air fresheners) to raise your company’s profile.

9. Your customers do matter

Receive utmost feedback from your customers. Their opinions are important, and you must continue creating products that solve their problems. That’s why you need to collect information from consumers and analyze this data to modify your services. Surveys are beneficial tools for gathering information. Focus on what your consumers want, not what you wish to sell. If your services don’t resonate with the customers’ requirements, you might lose these people to your competitor.

10. Safeguard your assets

Your assets might be your last hope when your company encountered unavoidable collapse. Protect these assets since these are the lifelines you might need to save a failing business. This stuff you own can generate cash flow in the future and improve your organization’s financial situation. For instance, you can sell the machinery owned by the company or rent office space temporarily. These assets can become your much-needed backup for the business.

11. Trust your team

Your employees are your most precious asset. But it’s your responsibility to ensure their correct utilization. Employees who’re working just for the paycheck might not be the right choice for your company. You need to connect with them and ascertain that they understand your business model. Your workers must be dedicated individuals who’ve committed themselves to success. Train them to become more efficient and listen to their recommendations to promote communication.

12. Cherish the risk

Entrepreneurship thrives on risks and challenges. Some business owners prefer playing it safe during a time of crisis. In reality, avoiding risks may diminish your productivity and tamper with your innovative essence. Making brave decisions is often the route to save your failing company. When Private White decided to release branded products, they faced the responsibility of handling inventory and marketing. But this decision ultimately contributed to their growth and popularity.


As an entrepreneur, you might’ve speculated the most dominant reason for business failure. Here’s what the experts agreed upon after a careful investigation. According to the U.S. Bank, 82% of small businesses collapse due to poor cash-flow mismanagement! No wonder there’s an 80% chance that your company’s toast after two decades of service. Moreover, startups crumple since around 80% of them begin with insufficient funds or haven’t created a well-established business strategy. In short, money problems can rupture your smooth-sailing vessel and leave you a veteran of financial bankruptcy. So, avoid financial losses and develop a fiscal awakening. Follow our suggestions and avoid failure.

Industry Insights: What are the Top 4 Obstacles That Prevent Business Growth?

StrategyDriven Entrepreneurship Article |Business Growth|Industry Insights: What are the Top 4 Obstacles That Prevent Business Growth?You can never stand still in business or you risk being left behind by your competitors, but there can often be some obstacles that are blocking your path to future prosperity, all of which are often negotiable if you know how to get around them.

Being able to get what your business needs in terms of new equipment is just one challenge that you have to find a way to face up to and if you can learn from others that have been there before you it could give you the vision to succeed.

Here are some pointers on how to clear some common hurdles that might be stunting your business growth.

Coping with change

As your business evolves and attempts to grow it will become abundantly clear that you can’t always rely on the same format that has got you to this point so far.

Businesses tend to become more complex as they grow and that means you will have to implement strategies that deal with challenges such as communication problems when there are more people in your team.

Innovation can be harder to implement when you have a rigid system that hasn’t changed from how it used to be in the beginning and this is why you need to consider ways to pull everyone in the same direction if you want to enjoy a smoother path to growth.

Not keeping an eye on cash flow

A growing business is always going to be hungry for cash and if you don’t plan for the financial strain that you might be under as the company expands it could easily derail your plans in a very short space of time.

Cash flow issues are a primary cause of business failure and it doesn’t have to be a lack of turnover that causes your cash crisis, as growth spurts are equally challenging to your survival if you don’t manage them properly.

Make sure you have an accurate cash flow forecasting system and use it to predict exactly how much cash you will need at any time to fund your growth.

When you need more equipment

Whether you are running a manufacturing business or operating in the service industry it is likely that you will need to acquire more equipment in order to cope with increasing demand and a growing payroll.

Look at efficient ways to get your hands on these new items and to upgrade your old stock. This could be achieved by browsing auction sites to see if you get the equipment you need for less, and sell what you no longer need.

You might also want to look at arrange equipment finance to help fund your growth plans.

When you fail to plan, you plan to fail

There is a lot of truth in this old business adage and the bottom line is that you can’t expect to overcome any obstacles in your way if you don’t create a viable business plan that shows you how to navigate your way through these stormy waters.

If you set some realistic goals and produce a credible blueprint for success you should find that your path to achieving business growth has a few fewer bumps in the road.

Golden Rules for Maintaining a Healthy Cash Flow

StrategyDriven Entrepreneurship Article
Photo courtesy of Nicholas Youngson of NYPhotographic (Title CC BY-SA 3.0 NY)

You have, no doubt, heard the saying ‘cash is king,’ and it may be cliché, but it is definitely the truth. No business can survive without any cash. It is the fuel that keeps the engine running. This is why all companies, especially SMEs, need to have a strategy in place for maintaining a healthy cash flow and dealing with any potential related problems that may arise.

Have a clear process in place…

Businesses run efficiently when they have clear procedures in place, and this is definitely the case when it comes to maintaining a healthy cash flow. You need to have a straightforward procedure for dealing with invoices and collecting payments. Don’t forget to practice what you preach; you need to send out invoices promptly if you are to be paid on time. How can you demand efficiency if you are not operating efficiently yourself? There are plenty of great tools available today to assist with sending invoices out and tracking them. By automating this part of your business, you can ensure everything runs more smoothly and quickly.

Don’t accept defeat…

One of the worst things you can do is simply assume that there is nothing you can do about late payments. Many business owners assume that it is out of their hands. After all, they cannot literally force the client to pay on time. You need to get rid of this defeatist attitude. No matter what frustrating business problem you are faced with, there is always a solution. Of course, you can improve your internal practices, but if this does not solve anything, there are other options. Working with a cash flow finance company is highly recommended. If you get an indication that a client is not going to pay on time, a finance firm will pay on their behalf. The client will then pay the lender instead.

Do your research beforehand…

It pays to do a bit of research about the customer beforehand. This is especially the case for any substantial orders. Begin by acquiring their credit report. This will give you a good indication as to whether the potential client is someone to trust. If they do not make payments on time, they will have a bad score, and this should be an immediate red flag. You should also find out about the payment practices of the customer. For example, do they pay on an ad-hoc basis? Do they only pay on a certain day per month? By knowing a customer’s payment habits, you can plan more efficiently. The more you know, the stronger your position.

Set an upper limit per customer…

Finally, make sure you set a bespoke upper credit limit for each of your customers. You can use the credit check you obtained to assist you with this. Also, obtain references from other businesses that have traded with them. You need to determine the risk you are exposing your firm to when arranging any type of credit agreement. Once you have set the limit, do not budge.