Cash flow management: what it means in business and why it’s important

The term “cash flow” refers to the lifeblood of a business: simply put, the money that enters and leaves your coffers, allowing the enterprise to survive and hopefully thrive.

Cash inflow is the money coming in, usually from selling your products and services, but also from things like loans or investments. Cash outflow, on the other hand, is money going out to cover things like supplies, wages, and taxes – in other words, your small business expenses.

If you don’t stay on top of what’s coming in and going out, it’s easy to run into trouble. That’s where good cash flow management comes in.

In this guide, you’ll learn what cash flow management is, how to do it right, and why it can make all the difference for your small business finances.

What does cash flow management mean in business?

Before we talk about how to manage cash flow in business, let’s start with the key question: what is cash flow management?

A straightforward cash flow managementdefinition is that it means monitoring and efficiently handling the money flowing in and out of your business. It’s not just about how much cash you’re expecting, but also when you’re expecting it.

Timing is everything, because even if your business is profitable, you can still run into problems if your bills are due before the money hits your account.

Cash flow management also involves finding ways to improve your cash flow,whether that’s adjusting payment terms, cutting costs, or securing financing when you need it.

What are the benefits of good cash flow management?

Why is cash flow management important? It makes sure you always have enough money to cover your expenses. By keeping an eye on your cash flow, you can plan ahead, handle unexpected issues, and make choices that keep your business running.

Getting it right brings some other benefits when it comes to:

Growth  

If you’re looking into how to scale a business, having a handle on your cash flow makes it a lot easier to turn those plans into reality.

Flexibility 

Managing your cash flow gives you the freedom to react when unexpected challenges pop up or new business opportunities arise. You won’t have to scramble for funds or dip into personal savings.

Improved credit profile 

Keeping cash flow steady and paying your bills on time can boost your business credit score, making it easier to secure financing with better terms.

Trust 

When you consistently pay suppliers on time, you build stronger relationships. This can lead to better deals and give you room to negotiate more favourable payment terms if you ever need them.

How to manage cash flow effectively

We’ve already mentioned that the first step to managing your cash flow is keeping track of your income and expenses. You can do this best with two key documents: a cash flow statement and a cash flow forecast.

Cash flow statement

A cash flow statement shows the money flowing in and out of your business over a set period of time – whether it’s today, last week, or last month. It’s usually broken down into three sections:

Cash flow from operations (CFO)  

This covers the cash your business makes or spends on day-to-day activities, like sales from your online store or operating costs like merchant credit card fees and shipping.

Cash flow from investing (CFI) 

This tracks money spent on investments, like property or equipment (such as a self-service kiosk for your café), as well as any cash earned from selling those assets.

Cash flow from financing (CFF) 

This includes money coming in or going out from things like loans, repayments, or funds raised through small business crowdfunding efforts.

Your cash flow statement can offer valuable insights into how your business is doing. For instance, a good cash flow management KPI to focus on is operating cash flow (cash flow from operations).

It shows how much cash your core business operations are generating, giving you a good idea of your ability to stay financially stable without relying on external funding.

If you’re just starting out, you can create a basic cash flow statement using a spreadsheet. As your business grows, you might want to use cash flow management tools to automate the process. A simple but effective tip is to separate business and personal finances to bring greater clarity to your records and make it easier to stay organised.

Cash flow forecast

While a cash flow statement looks at the past, a cash flow forecast helps you plan for the future – an essential part of good cash flow management.

A cash flow forecast predicts how much cash will be coming in and going out over the next few weeks or months. It includes expected inflows, such as client payments, along with upcoming expenses like VAT or payroll.Crucially, it also helps you spot potential issues ahead of time, so you can adjust as needed.

While cash flow management and forecasting go hand in hand, how often you review your forecast depends on your business. If you’re the owner of a busy café or retail business you might check it daily, while if you’re a freelancer with fewer transactions you might review it monthly to catch any red flags like slower sales or rising costs.

Cash flow management tips for small businesses

With tracking and forecasting in place, and regular check-ins scheduled, you can focus on how to improve cash flow. Let’s consider four things to keep in mind when managing your money.

Review your invoicing process

The faster you get paid, the healthier your cash flow will be. It can be a good idea to send out invoices as soon as the job is done, or the product is delivered, rather than waiting until the end of the month.

You might also consider shortening your payment terms to speed things up, say from 30 to 15 days. Just make sure to give your clients a heads-up about the change. Offering a small discount for early payment is another way to encourage clients to pay faster.

Weigh up new investments carefully

Big purchases, like new equipment, can help your business grow but can also put pressure on your cash flow. Instead of buying expensive gear outright, think about leasing it. Leasing spreads the cost over time, so you’ll have more cash on hand for day-to-day expenses.

You can use a similar approach even if you’re just exploring side hustle ideas. For example, if you’re thinking of getting into the food and drink industry, you might rent a coffee triketo sell hot drinks on the go. By minimising your financial commitment, this kind of approach gives you a chance to test small business ideas with more peace of mind about your bottom line. 

Whether you’re growing a busy enterpriseor exploring how to start a side hustle, always consider the return on investment and whether leasing might be the better option.

Offer more payment options

Providing more ways for customers to pay will make it easier to close sales and improve your cash flow. If you’re currently a cash-only business, you might want to consider investing in a card reader or trying out a smartphone-based solution like SumUp’s Tap to Pay on iPhone. 

If you already take card payments, consider getting creative with some innovative small business payment options to maximise customer convenience. Here are five ideas you could try.

QR codes

This payment method allows customers to scan QR codes with their smartphone to be directed to a secure payment page. If you run a busy food truck, displaying a QR code could speed up the line, allowing you to serve more customers faster and get more cash flowing into your business.

Payment links

Payment links are shared like any other URL links online, so that customers can simply tap or click on them to make their payments. 

Say you’ve been looking at how to use social media for small business and decide to make products available via Instagram. You can then share your links through that platform so customers have a shorter journey to checkout, reducing the likelihood of them changing their mind.

Gift cards

Selling gift cards can be a fantastic way to improve your cash flow. They bring in immediate cash when customers buy them for their friends and family. On top of that, recipients often spend a bit more than the card’s value when cashing them in.

Phone payments

Taking card payments over the phone allows you to bring in cash without seeing customers in person. So, if you run a restaurant, you could take deposits over the phone for reservations, improving your cash flow and reducing the risk of no-shows.

Buy Now, Pay Later (BNPL)

Offering BNPL allows customers to spread out their payments while you get your money upfront. If you own a designer boutique, for instance, offering BNPL could help customers commit to bigger purchases on luxury items, keeping your cash flow healthy.

Monitor your expenses closely

Keeping a close eye on your expenses will help you spot ways to save money and improve cash flow. Look at what you’re paying for materials, advertising, and utilities – are you getting the best value? Don’t hesitate to ask your suppliers about longer payment terms or discounts for bulk orders.

Also, make sure you’re claiming all the small business tax deductions you’re eligible for, like Business Rates relief. Making use of accounting tools for small business can streamline your monitoring and highlight deductions you can benefit from. 

You may also find that hiring an accountant or financial advisor will be money well spent, both when it comes to identifying savings you can make, and how to plan ahead.

How to manage cash flow when things are tight

Even with solid cash flow management, there are times when your cash flow may turn negative – meaning more money is going out than coming in. When negative cash flow hits, it can lead to cash shortages, which makes knowing how to handle these situations a big part of how to manage cash flow in a small business.

If you’re in a pinch, focusing on these key areas can help:

Spending

When funds are tight, prioritise essential expenses like wages, rent, and utilities. Staying on top of these will keep things running, even if you have to delay less urgent payments. Hold off on non-essential purchases until your cash flow improves.

Also, look for short-term ways to cut costs. Maybe you can pause software subscriptions you’re not using, or scale back plans for how to advertise your business.These temporary cuts will conserve cash without hurting your business too much.

Don’t forget – you can also talk to suppliers and ask for help. Even getting a little more time on one or two payments can make a difference when things are tight.

Financing

Sometimes, cutting costs won’t be enough to handle an unexpected expense. If you need more time to cover a large cost, arranging a payment plan could help spread out the expense.

For short-term cash gaps, a business credit card can provide quick access to funds. Another option is a cash advance,which can boost your working capital and cover immediate needs while you sort out the shortfall.

For example, if you own a restaurant and a local event gets cancelled, bookings might drop. You’ll still need to pay wages and rent until business picks up again, and a credit card or cash advance can help you cover those essential costs.

Pricing

If cash flow problems stick around, it might be time to review your pricing strategies.Rethinking how to price a product or service could help ensure your prices not only cover your costs but also support a healthier cash flow.

Bear in mind that a slight price increase can make a big difference in your revenue without scaring off customers. For example, if you run a retail store and notice margins are getting thin, you could try raising the price of your bestsellers by a small amount. Customers might not even notice, but the extra revenue could help ease cash flow pressures.

How to safeguard future cash flow

We’ve seen how managing cash flow is key to keeping your small business healthy and growing. By keeping an eye on your income and expenses, forecasting future cash needs, and using practical strategies, you can make sure your business stays stable, even if things get financially turbulent.

But no matter how well you manage cash flow, unexpected events can still pop up. That’s why it’s smart to take a few extra steps to protect your business.

Build a cash reserve

Having a cash reserve gives you a cushion for tough times. A good rule of thumb is to save three to six months’ worth of operating expenses. If that feels like too much, start by setting aside a percentage of your profits. Keep the money in a savings account that’s easy to access in emergencies, but don’t dip into it for daily expenses.

Get insurance

It’s worth thinking about getting insurance to protect your business from potential risks. For example, a seafront fish and chip shop might want to consider flood insurance. Doing a quick SWOT analysis can help you identify your specific challenges and strengthen your small business risk management strategy.