Your Ultimate Guide to Managing Cash Flow for Small Businesses

Growing a business in an overly competitive world like ours is no easy feat. Companies have to understand their current needs and continually optimize processes for efficiency. In addition, businesses have to adapt to a fast-changing environment or risk the chances of shutting down. Therefore, it is essential to plan funds, budgets, and the measures you might have to take to ensure your business is not buried in debts and continues to operate without a hitch.

SMB owners especially might find themselves lost in numerous metrics, data, and reports and eventually realize that they have been running the whole enterprise at a loss, or at least not at their optimal best.

Want to avoid it? We've crafted this article to help business owners understand everything they can do to manage cash flow and help their business thrive. So, let's dig in.

What is cash flow, and why does it matter?

In simple words, cash flow is the amount of money generated and consumed in a certain period. So basically, it's the movement of cash that comes in and goes out of your business during a financial period.

It is important to note that cash flow can make or break your business. Don’t take our word; take a look at the statistics provided by the US Bank:

Based on a study conducted by the US bank, 82% of small businesses do not achieve their goals and fail because of problems with their cash flow management.

That is a substantial percentage to ignore. But the good news is, with the right knowledge and tools, cash flow management, like any other process, can be simplified, streamlined, and automated.

What are the different types of cash flow a business can expect to see?

Cash Flow from Operating Activities (CFO)

Cash Flow from Operating Activities (CFO), also known as Operating Cash Flow (OCF), refers to the income generated from the production/manufacturing and sale of goods or services. It is concerned only with core business functions that cover everyday business operations to generate revenue for the business.

A good rule to swear by for OCF is that the cash inflow should be higher than the amount of money that flows out of the company. This is extremely important for the company's viability and long-term goals.

Advertising your products/services using various marketing strategies such as social media trends, using QR codes with the use of dynamic QR code generators, email marketing or SMS marketing to attract more customers can improve the sales process, which in turn generates new revenue, hence keeping a steady inflow of cash.

Cash flow from Investing Activities

Whenever a company spends on long-term investments like data security, properties, equipment, or sees changes in its cash position due to mergers or acquisitions, it is categorized as Cash Flow from Investing Activities.

A telltale sign for what can be categorized under this segment is that purchase is in negative cash flow (or cash flowing out) initially but yields a positive cash flow (cash flowing in) in the long run. We’ll talk more about negative and positive cash flow in later sections.

Cash flow from Financing Activities (CFF)

Cash flow from financing activities or CFF is probably one of the most important metrics your investors will look at. CFF reflects the net amount of cash flows that fund the company and deal with transactions that have to do with debts, equity, dividends, and other such activities.

A company’s CFF provides its investors or creditors insight into the businesses’ financial strength and the efficiency of capital structure management. As a small business, if you want to prove your worth to Investors, VCs, or creditors, cash flow management is your ticket to earning their trust.

The ABCs of cash flow management

Before we jump into the how-tos of cash flow management, we’ll touch on a few concepts and jargon that you might encounter repeatedly.

Positive cash flow

When the net inflow and outflow of cash in a given period is greater than zero, it indicates positive growth in the business's cash reserves. In other words, when a company earns more money than it spends, the cash flow is said to be positive.

Note: Positive cash flow is not the same as profits.

Negative cash flow

Contrasting positive cash flow, when the expenditure is higher than revenue earned in a specific timeframe, the business is said to have a negative cash flow. This is a rather common occurrence, especially for SMBs.

Note: Negative cash flow is not to be equated with losses.

Profit vs. Cash Flow

It is easy to confuse cash flow with profits, especially when the business has positive cash flow. However, these metrics are very different, no matter how similar they might sound.

Cash flow considers all the cash that enters and leaves your business during a financial period. Cash can as easily flow out as it flows in, and hence, cannot be equated to profit.

On the other hand, profit is the "financial benefit" realized when the revenue in a defined period is higher than all expenditures, including payroll, business expenses, operational costs, and taxes. Once you have accounted for all spending, the remaining amount becomes your profit - this does not flow out and is all yours!

Common cash flow problems (and mistakes) SMBs encounter

To establish, and more importantly, to run a successful and profitable business and generate leads, it is necessary to ensure a proper and smooth cash flow. Unfortunately, most small businesses fail due to inappropriately managed cash flows. Thus, it is crucial to establish a standard cash flow control and management mechanism for its success.

It is better to do it initially when planning and launching your business to avoid possible or even, to some extent, unpredictable problems. But, on the flip side, starting a business without being prepared for difficulties means creating opportunities for tons of complications and wasted efforts and resources for the company in the long run. Therefore, it is one of your primary tasks to track and control cash flow regularly and correct the process accordingly to prevent any issues that may come up.

This brings us to the most common mistakes and issues businesses encounter regarding cash flow:

Lack of realistic budget: Your budget when starting a business should be practical. Wrong or excessive estimates coupled with the lack of a cash reserve will make you start on the wrong foot. On the other hand, it would be unpleasant to run out of money before the business is even open to the public. So, make sure to consult with experts or use specific web applications to map accurate budget projections.

Unrealistic expectations: Don't expect quick profitability. Moreover, don't think there will be a queue of those longing to buy anything from you once open. It takes time to establish and run a profitable business. From website hosting costs and social media ads to employee retention and other operations, different expenses might arise. Thus, ensure you make sure to frame a realistic time-span to break even, map your profitability accordingly, and have enough cash to stay afloat until the company runs smoothly.
Not planning ahead: Planning helps you spot and mitigate potential roadblocks that deter growth. Thus, make cash flow forecasts for your spending for at least the coming month, quarter, and year. Remember that overhead costs, such as high rental costs, travel, and representational costs (restaurants, gifts, etc.), should be kept under control to avoid facing cash flow problems.
Expanding too early: Don't be too fast to expand and grow your business. This may harm your cash flow and day-to-day operations that might not align with the scale and growth you intend. Instead, pay attention to your position in the market, verify your financial abilities, go through your expenses, and only then decide to expand.

With the mistakes to avoid listed, let's see how businesses can fix cash flow-related problems:

Audit your finances

Cash flow is itself about money that circulates in your business. This means that auditing your finances is one of the things you must prioritize while operating your company. Observing finances is your number one priority and is undoubtedly a must for those who have problems with their cash flow.

Auditing finances is not a simple task. In this case, it is excellent to work with your business accountant and inspect all of your business' financial aspects. This is when you need to pay attention to the company's income, savings, expenses, investments, and other finance-related fields to identify the gaps and need-to-improve areas of the undertaking. If, for example, you’ve decided to make video podcasting a part of branding initiatives, ask yourself if or not you have the right financial means for a comparatively expensive means of marketing.

Conducting financial audits helps identify and resolve cash flow-related problems and offers other advantages, such as fraud detection, a better reporting system, better determination of profit, and so forth.

Take care of your invoices

There are many root causes for cash flow problems. Among these, one is most definitely missing, inaccurate, or incomplete invoices. Be it customer payment-related invoices or employee reimbursement-related invoices - there is no denying that businesses have to keep track of them to know the current state of business finances. An easy start here would be to use tools to do the heavy lifting for you.

To ensure the customer front goes as planned, you can use an invoice generator tool that creates a professional and straightforward invoice for you to send to your customers. For invoices and expense reports from employees, you can use an expense software to streamline and manage all business expenses under one easy dashboard.

Integrate accounting software

Modern technologies have already occupied our world, and nowadays, every worth-its-salt company has software integrated into their system. Accounting software is not an exception since it offers exclusive advantages to its owners. Some of the benefits of doing so are:

Accurate information: Managing your business's money is highly complicated, significantly when constantly growing. So, to better organize the process and, more importantly, to fully understand your business' financials, it is always a good idea to integrate new technologies. Additionally, AI-based machines are more intuitive and rid of human intervention, automatically eliminating the risk of error or bias.

Reports: Accounting software automates the process and provides its users valuable insights and reports to improve the overall cash flow of the business and the management process in general. These reports automatically become a guide map for users. They contain all the critical information regarding the ins and outs of cash within a business. This helps identify and rectify gaps in the cash flow process.

Save time, effort, and resources: Accounting is not an easy process, especially when managing your business's cash flow. So, suppose you want to save time and focus on other high-level tasks, you can consider using an accounting software. This is a surefire way to operate a business without a hitch and enjoy the benefits it brings with it.

Work with professionals

It's a no-brainer that running a business is hard. However, with the help of the right tools and professionals, companies can make the process easier. Hire or outsource niche-specific professionals to help you fight the uphill battle of cash flow management and save your business from unwanted situations like negative cash flow or bankruptcy.

How to create and manage healthy cash flow in 2022

Businesses need to understand that their cash flow management process automatically starts the minute they open shop. So, want it or not, business owners need to consider managing their cash flow right from the start. Here are some tips to help manage cash flow:

Keep an eye on your cash flow

Cash flow keeps the business alive. Thus, you need to monitor it regularly to avoid possible errors or fix the existing ones before it is too late. To better conduct the monitoring process, you can use accounting software to have a better and organized cash flow management system, accurate and informative reports, and so much more. And remember, never leave your cash flow unnoticed. It is often easier to nip the problem in the bud than fight against an already-formed and rooted problem.

Start using business credit cards

After creating a business, keeping different bank accounts and having separate credit cards is highly recommended. In such cases, it is good to obtain a business credit card that will help you operate your business in the financial and management field.

Business credit cards can help you in the following ways:

Rewards - Most business cards come with different rewards such as airline miles for business trips, cashbacks, and more. This makes it an excellent choice for businesses that want to make an extra buck on their investment. However, this is not the only advantage!

Easy cash flow management - Businesses with problems with their cash flow usually need extra help while monitoring the money circulating within their company. Luckily, business cards offer a chance to track expenses and transactions, which is a decent way to organize finances and see the bigger picture. Just imagine everything kept and organized in one place. That's genius!

Easy access to credits – Using a business credit card is not only about rewards and cash flow management. It is also about your credit reputation. When paid and handled efficiently, you automatically create an impression of a responsible business that is proactive and pays its debts on time. Moreover, in the off chance that you might need loans in the future, your credit reputation can increase your chances of getting them.

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Lease is exactly what you're looking for!

Buying a property is, of course, praiseworthy; however, it is not helpful for a business that wants to expand. Imagine your business is growing, and the place you were renting as your office is already too small: this is when it's better to lease assets rather than buy them.

This way, you can avoid wasting too much money on property and assets that you don't need anymore. Remember, a business is constantly moving, and sometimes, you don't need or, in bad cases, can't afford the assets you've once purchased. So, if you start renting property or other assets, you will save money and improve cash flow, like killing two birds with one stone.

Reducing expenses

A business incurs costs almost on a daily basis. Apart from the production and operating costs, companies also incur employee-related expenses such as Wi-Fi and phone bills, food and mileage reimbursements, and more. These expenses are necessary as it’s beneficial for the employee engagement process. Thus, when it comes to reducing expenses, businesses must first understand all the types of expenses they incur.

Once they have this information in hand, they can conduct departmental audits and deep-dives to understand which expenses can be reduced, eliminated, or optimized. Businesses can conduct these audits on a quarterly or bi-annual basis. Based on these findings, Finance teams and business owners can further tighten or redefine budget allocations, travel and expense policies, and more.

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Be prepared for emergency situations

Emergencies can happen to anyone and at any time. Thus businesses must always be prepared to face them both mentally and financially. Make sure you create a reserve for emergency cash that you can use if your business suddenly goes out of money or experiences negative cash flow. Here are some valuable tips to consider while creating a cash reserve:

Define the amount of money you need: As a business owner, you need to understand that your business will depend on the money you save in reserve for an emergency. So, make a reasonable decision regarding the amount and the timeline you must abide by to save that sum of money.

Always compensate: Already used a certain amount of money from your reserve? That's okay, and you can do that. However, don't forget to replenish your reserves! Because let's be honest, an emergency can always come back. So, whenever you take some cash from the fund, make sure you return it.

Don't give up: If you think you should invest a fortune in your cash reserve, you are mistaken. In this case, the amount of money does not matter. If you're consistent and responsible enough and invest a certain sum of money into your cash reserve regularly, everything will be just fine.

Benefits of automating cash flow management

As we already mentioned, automation plays a pivotal role in our constantly-changing world. And now, automation is widely used in the world of finances, especially when it comes to managing cash flow.

You may think that automation is unreliable and does more harm than good. Yes, that's an opinion every new kid on the block has. However, if you dig deeper and investigate this field, you will see everything yourself. Automation is a true life-saver and not the opposite. To be more precise, here are the top benefits of using automation-tech to manage cash flow:

It keeps everything in one place: Money comes and goes, and it is almost impossible to keep pace with it. However, suppose you have a decent management system; you will have a pulse of all the changes and movements within your business. You will also have access to all your bank accounts, loans, or deposits, helping you stay on top of things, always.

Monitors your expenses: Every business makes expenses. It can be purchasing assets for your business, taking credit from the bank, or reimbursing employee expenses. However, if you don't properly track your expenses, you will work at a loss. Thus, with the right cash flow management software, you can see the bigger picture and understand what you spent your money on and why.

Helps you stick to budgets: If you want to control expenses, you need to have specific financial budgets for it. With the right software, you can create realistic budgets and boost process efficiency with little to no effort. Remember, budgets are just like guide maps that enable you to see the bigger picture and take control over the direction you're moving in.

Sees the future: AI is called intelligent for a reason. Based on enormous data collected by the software, cash flow management automation efficiently forecasts everything related to your cash flow. For example, it can indicate negative cash flow situations, especially when you risk facing a cash shortage. In other words, with the help of its forecasting feature, this software helps you avoid unnecessary headaches and undesired situations. And what's more, it gives you time to prepare and prevent such troubles.

Summary

"If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow."
- Jack Welch.

As you can already understand, cash flow is the basis of every business. If managed right, it can do magical things.

Do you want to achieve business success and position yourself in the market with flying colors?

Then, managing cash flow is a surefire way to reach all of your goals! Just don't forget to work with professionals, integrate with the right software, have an emergency cash reserve, and control and reduce your business expenses.