Guide to Managing Small Business Cash Flow

Small businesses live and die by cash flow. When a business has adequate financial reserves, it’s able to keep the bills paid and the employees working, even when unexpected expenses come up, or when accounts receivables are slow to arrive.

Small-business owners know the importance of maintaining healthy cash flow, but some are flying blind when it comes to knowing how much capital they’ll actually need to make it through the months ahead. Unfortunate small businesses have been blindsided with liquidity crises that could have been prevented with a bit of forethought. While some cash flow problems are difficult to foresee, many can be spotted on the horizon long before they actually arrive. Learn how you can better manage your cash flow below.

Cash Flow Fundamentals

There are a few keys things you should do and be aware of to better manage your cash flow. Doing just these basics alone though may not be enough. To truly manage your cash flow, make sure you’re attuned to these fundamentals, and then keep reading to see how you can help prevent cash flow crunches.

Defining Your Company’s Credit Policy

For B2C companies, consumers generally pay with cash or a credit card, and the business doesn’t have to worry about extending credit or sending invoices. But, for B2B businesses, vendors usually want to be billed for products and services, not pay up front. In order to effectively manage your cash flow as a B2B business that extends credit and waits for repayment, you’ll want to create a credit policy for every vendor you work with. Your credit policy can help you determine all the necessary payment elements of your vendor contract, and can help make sure you don’t extend a vendor more credit than your business can handle. Some things your credit policy should outline includes:

  • Credit limits: How much are you able to extend and under what circumstances?
  • Credit terms: When is the payment due? Are there early payment rewards or late payment penalties?
  • Deposits: Will you require the vendor to pay partially in advance?
  • Credit cards and personal checks – Should you accept them?
  • Customer information: What do you want to know before setting a credit limit?

Credit limits can be daunting for business owners. Set them well and you may attract vendors with favorable terms while effectively managing your cash flow. Set them poorly and you could lose sales or find yourself in a cash flow crunch. Checking a vendor’s business credit file before extending credit can help you manage your risk. You’ll be able to see past payment information and get an idea of how the company pays its bills. You can even get a recommendation on how much credit to extend to each vendor, based on the scores and ratings in its file. Learn more about monitoring other companies’ business credit at the bottom of this page.

Already extending credit to vendors? Use BusinessMonitor™ to monitor the business credit files of companies you do business with for free‡

Even once you’ve established your business’s credit policy and set limits for extending credit, you can still help manage your cash flow with invoices and statements. Your invoices should be clear and easy to read while identifying exactly what the vendor is being billed for and for how much. Be sure to include any payment terms – like early payment incentives and late payment penalties – and due dates, to help make sure you get paid.

The Basics

  • Assess Your Fixed Expenses

    Fixed assets are typically the easiest to manage. This includes items like loan repayments, rental fees, and insurance, which are typically due on specific days of the month. The important thing to manage here are the dates on which these items are due. Try to put some distance between the dates on which you receive funds from invoices and customer payments, and the dates on which you make your fixed payments each month.

    With enough days separating the two events, you may be able to bank your cash and create a small bit of revenue from interest depending on your account. Every little bit counts, and creating an internal system like this in the early days of your business can pay off later. As you grow, that small revenue bump may grow, too.

  • Estimate Variable Expenses

    While some bills will always fluctuate from month to month, it is possible to determine a reasonable, educated range of your expenditures. For instance, the power company may be able to help you determine a close estimate of your monthly electric bill. When you are making these estimates, be sure to use the higher numbers; it is almost always better to estimate that an expense will be higher, rather than lower. Whatever is left over can be placed in reserve for an end-of-year bonus, a capital investment, or to help grow the business.

  • Understand Credit Card Processing Rates

    One area where small businesses can be tripped up is the fees they typically incur for credit card processing. Make sure you read the terms of your credit card processing agreement thoroughly, and ensure that you can budget your cash flow according to a stable rate. Consider avoiding a tiered pricing structure that can change at the whim of the credit card processor. Instead, try looking for a service provider that will bill you using interchange rates.

  • Regulate Customer Payments

    If you offer some sort of payment plan for your customers, or if they have recurring fees such as membership dues, take stock of when these payments are due. If possible, sign up your customers on an automatic debit system so that you don’t have to worry about them forgetting any payments. It can also be beneficial for some of your customers, as they won’t have to worry about an account lapse.

  • Invoice Early

    Keep strict records of your work, and make sure that you send an invoice to your customer as soon as the job is done. The more you delay, the longer it tends to take clients to pay. Send an invoice via e-mail the very day you are finished, and then consider following up with a paper copy. With an e-mail, you will have a time-stamped record of the invoice.

    It may be worthwhile to investigate online payment systems as well, which allow you to send an invoice through their website, and then receive an electronic transfer. Be aware that some of these services will take a percentage for handling the transaction, and that will affect your cash flow.

Forecasting Your Flow

Now that you know the basics, let’s see what else you can do to help improve your cash flow. If you want to avoid cash flow crunches, you’ll want to be trying to anticipate future windfalls and challenges as often as possible. One of the best ways to do this is with cash flow forecasting. Cash flow forecasting can be a crucial financial management element for any small business. For small-business owners, cash flow forecasting involves tallying up all a business’s expected income for 90 days or more, and subtracting its expected expenses, for the purpose of ensuring that cash outflow never exceeds cash inflow at any given time. Knowing in advance which expenses are looming and when they will come due allows you to plan ahead and avoid insolvency.

How to Create a Cash Flow Forecast

You don’t have to be a mathematician to create a fairly accurate cash flow forecast, and all you need is a spreadsheet program or a pen and paper. The elements of a cash flow forecast are as follows:

Income: The income section should include all cash inflow estimated for a give time period, including estimated actual cash and credit sales, loans, wage subsidies, and infusions of capital from investors or shareholders.

Expenses: Under expenses, small business owners should file employee wages, tax payments, purchases of business assets, utility bills, and anything else likely to deplete the business’s cash reserves.

Surplus or Deficit: By subtracting estimated expenses from projected income, you can arrive at the total estimated surplus or deficit for the time period in question. By adding or subtracting this amount from the business’s current balances, you can fairly accurately predict the business’s cash position for the coming months.

Dos and Don’ts of Forecasting

When creating a cash flow forecast, avoid being too optimistic. Remember, the purpose of this exercise is to fend off cash flow crunches, not to daydream about hypothetical stories of runaway success. Just like with estimating your expenses, you’ll want to gauge things on the higher end, so you aren’t caught off guard.

Also, be sure to take seasonal fluctuations into account. If your business has waned during the summer months for three years running, odds are good that this summer will be no different. Smart business owners prepare for seasonal downturns by setting aside adequate reserves or applying for a line of credit when the business is flush with capital. That way, they’re able to weather lean times without the stress of wondering how they’ll keep the lights on. You can learn more about how to help manage cash flow as a seasonal business at the bottom of this page.

Accounting Best Practices

Not many entrepreneurs are experts in business accounting. As a result, this is usually one of the most challenging practices for new business owners to grasp. That said, if you want to run a successful business that avoids costly bank penalties and potential fines from the IRS, which could hugely impact your cash flow, then you have to put in the time to learn at least the basics of this important business process. Here are ten tips to get you started:

Go to your local library and you’ll find an endless variety of resources on how to do accounting for a small business. This is one of the most affordable and convenient ways to learn the basics, so it is something that every burgeoning entrepreneur should use to their advantage.

If you find you just can’t grasp the book versions of the topics, then there are also dozens of programs and tutorials online where you can find a more visual approach to learning. The SBA’s Learning Center also has an Introduction to Accounting course. Whatever method you choose, take the time to learn the basics!

This is so important that it could realistically be number one on this list. Think about it, if you’re new to business accounting, then the last thing you want to do is muddy your financial waters by merging your personal and business accounts.
Once you understand the accounting basics, you should be able to clock the details of your books with just a glance. If you find you are having difficulty making determinations, then odds are your books are becoming too complex. In the early days of your business, it may help to keep separate books for income, expenses, debts, and other financial data reports.
In accounting, the tiniest missed detail can set off a chain reaction of miscalculations and problems. You can avoid this by being diligent in your recording, and being as detailed as possible so your books are always accurate to the penny.
Many business accounting programs can be challenging to learn, but once you learn how to use them, they can be a tremendous help. These programs offer a wealth of benefits, from printable reports to forecasting and more, and they can make the job of balancing the books much, much easier for the new business owner.
You don’t want to go a long time without reconciling the books, because the longer you go between reconciling, the harder it can be to find and fix any discrepancies. Along with noting daily and weekly balances, you should aim to reconcile the books on a monthly basis, if not more frequently.
Now that you are a small business owner, you with most likely have to pay estimated quarterly taxes. But this can be tough for new entrepreneurs to get used to, and all it takes is one missed payment to get on the IRS radar. So, don’t forget to include your tax payments in your regular expenses to ensure that you always have your obligations met.
In the day-to-day of running your business, it can be easy to lose track of who owes you money. But, their missed payments can affect your business. You can help prevent this by keeping track of your debtors and send them timely reminders to ensure your accounts receivables are current.
Every business has certain expenses they can realistically do without. By recognizing them and eliminating them, you can help save your business money while streamlining operations. Plus, having less expenses to review will make your business accounting process a little easier.
In the event that you simply can’t grasp business accounting, don’t worry, that’s what professional accountants are for. Sure, their services can be costly, but at the end of the day, they could cost less than the potential fines and penalties you might face by keeping illegible books.

Don’t Make These Common Accounting Mistakes

Even if you do hire an accountant to help manage your business finances, there are still important things for you to do to help your accountant help you. And a few things to make sure you don’t do. From choosing the wrong accountant to DIY tax returns, here are some common mistakes that business owners can make with accounting:

Your account receivables keep track of the money that is owed to you. Failing to stay on top of your receivables can quickly lead to your expenses overtaking your income and should this happen; it can be very difficult to right the ship. You need to know who owes you money, what your terms are for those clients, when their due date is, and more. And, when clients’ invoices go unpaid past their due date, you have to take the steps necessary to get paid.
When you run a business, every dollar counts and that includes any cash used to pay for business expenses. But many new entrepreneurs fail to record their cash payments as expenses because they don’t identify cash in the same manner as they do checks or credit card charges. This can be a habit that comes back to bite you as the money has to come from somewhere, and odds are strong this will cause inconsistencies in your financial statements.
If you want to run an organized, successful business, then you simply have to have a system in place for keeping your expense receipts. After all, you’re going to need them come tax time to support any tax deductions. Plus, by requiring expense receipts every time an employee makes a business purchase, you will be able to monitor your company’s purchasing activity more closely.
Few entrepreneurs are also certified tax professionals, and if there is one thing that is difficult for new entrepreneurs to grasp, it is business taxes. If you are unfamiliar with business tax laws, then the last thing you will want to do is prepare and file your own taxes. Hire a reputable professional for this job. They can get you the largest return (if applicable) while also reducing the possibility of errors on your taxes.
As stated above, if you hire an accountant, you will need to make sure that he or she is reputable. Ideally, the accountant you choose should also have prior experience doing taxes for your type of company. You don’t want to put your business’s finances in the hands of someone who has never handled your business situation before. Ask questions and do your due diligence before selecting a tax professional for your business.

Tips for Seasonal Businesses

Cash flow can be problematic for seasonal businesses, especially when the bulk of your invoices are paid during only one quarter of the year. If you keep your doors open for the remainder of the calendar year, you will need to find a way to ensure that your cash flow manages to pay the bills, and to account for any unforeseen debits to your books.

Here are four common problems pertaining to cash flow for businesses that tend to see most of their sales during a limited period of time, or only a single season, and how to deal with them.

  • When Suppliers Want Payments Too Soon

    When your busy season ramps up, it is fairly likely that you won’t be sitting on a large cash reserve. So, when you place orders with your suppliers, arrange for a payment schedule that will allow time for your customers to pay their invoices. This way, you will have an easier time turning around and paying your own.

  • When You Have No New Revenue Streams

    If your business has no way to generate revenue during the off-season, then it is vulnerable to unforeseen expenditures. To fight this problem, it is wise to seek out new revenue streams in order to keep your business liquid. If you have a facility that you manage year-around, try to find new products to sell, or instead, see if you can sublet a portion of your space to others for storage. If you are a manufacturer, be on the lookout for short-term contracts that would allow you to manufacture goods for others.

    You might take your seasonal income and invest in items such as real estate or equities. Alternately, you might provide short-term loans to other small businesses, if possible. Finding ways to make your money work for you can be a boon to your bottom line. Further, if you find passive income streams, you won’t be too tied down when your core revenue stream returns during the high season.

  • If You’re Charged Monthly Minimums

    If your credit card processor charges you monthly minimums, you might be headed for trouble. These figures may be no problem during the busy season when the revenue is high, but they will pinch your cash flow stream when the slower months arrive. Be sure to pay close attention to your credit card processing agreement to make sure that this service doesn’t end up harming you later. Processing fees are something of a necessary evil in this economy, but you can always ask and shop for the very best arrangement that suits the demands of your business.

  • When You Pay Higher Rates for Small Orders

    During your off season, because you will likely be selling less, you will probably end up making smaller orders from your suppliers. These orders can tend to be more expensive on a per-unit basis, which can pinch your margins. If you can save on a per-unit price by purchasing a larger load from a supplier and it makes sense for your company, try to do so. Your cash flow may see some extra tightness up front, but this investment should pay off.

    If this is a durable good, you can see greater returns on the investment during your leaner months, and the only remaining expenditure to consider is the cost of inventory. Find other ways to reduce your overhead, like finding ways to trim the cost of your utility bills.

Business Credit Can Help Manage Cash Flow

When you think about managing cash flow, business credit probably isn’t the first thing that comes to mind. But, your business credit can actually play a huge role in managing your cash flow and helping you prevent crunches. Here’s how it works:

When you get a free D&B D-U-N-S® Number†, it creates your business credit file with Dun & Bradstreet. By adding trade references** or encouraging the vendors you work with to submit payment experiences, you can help impact the scores and ratings in your file. These scores and ratings are important, because if you know you’ll need a loan to prevent a cash flow crunch, or to get out of one, lenders often look at your business credit file to help determine risk. If your scores and ratings show that your business may be high-risk, you may struggle to get a loan. By building and managing your business credit file, you can help make sure you’re always in the best position to find funding or obtain new contracts.

By checking your customers’ and vendors’ business credit files, you can also help manage your cash flow better. By taking a look at the scores and ratings of the companies you work with, you may be able to anticipate slow or late payments, which can help you prepare on your end for a cash flow crunch. If you notice that the majority of your customers are likely to pay beyond terms, you can use your own strong business credit to apply for a loan that can help you pay your own bills why you wait on your receivables. When it comes to managing cash flow, it’s all about looking ahead and being prepared. Your business credit file and wise business practices can help you do both.

Real Life Cash Flow Management

Arkos, an aftermarket gas compression service company, used business credit to help relieve their cash flow issues. When Arkos formed as a spin-off, they inherited subpar business credit scores and ratings. By working with a Dun & Bradstreet Concierge Manager, they were able to impact their business credit and rebuild relationships with their vendors.

“Because of [our Concierge Manager’s] work, we’ve been able to go back to vendors that have been difficult to deal with in terms of increasing our credit limit or extending our terms and tell them to check out our Dun & Bradstreet scores again to see where we are today,” said Larry Sumrall, Supply Chain Manager for Akros.

“When they do, they’ve increased our limit and have extended credit.  The ability to obtain better credit terms has also positively impacted our short term cash flow and has made us more attractive to our insurance carriers.”

Learn more about how Akros impacted their business credit scores and improved their cash flow.


Photo Credit: linashib, Twenty20

† A free D-U-N-S Number can take up to 30 business days to receive.

‡D&B Business Monitor only indicates that a company or portfolio’s credit risk has changed and alerts you when such company or portfolio’s credit risk increases. To view actual scores and ratings, we recommend that you upgrade to one of our paid business credit monitoring solutions.