Cash flow management for small businesses

For small businesses, the difference between success and failure can often come down to cash flow management. Without effectively managing its cash flow, even a profitable business may struggle to meet obligations and capitalize on new opportunities.

Understanding your business’s financials, such as cash inflow and outflow, can help you make more-informed business decisions. Keep reading to learn more about managing cash flow as a small business.

What you’ll learn:

• Having a handle on cash flow may mean the difference between success and failure for small businesses.
• Issues like seasonality, outdated accounting processes, and overdue invoices are common challenges facing small businesses.
• There are ways to enhance small business cash flow management, like leveraging technology and iterative forecasting. 

Cash flow management for small businesses usually involves tracking and analyzing cash inflows and outflows to ensure liquidity and to help plan for future expenses or investments.

This includes using cash flow statements to examine the business’s current financial health and assess potential profitability, which is crucial for maintaining operations and charting future growth.

Both profit and cash flow are important for a small business.

Profitability indicates a business’s long-term financial health and whether it generates more revenue than expenses. Cash flow can be defined as the day-to-day movement of cash in and out of a business.

While profit represents big picture overall financial gain (or loss), cash flow is more of a measure for short-term operations. For example, effective cash flow management can ensure there will be enough cash on hand to cover immediate expenses like payroll and supplies.

A cash flow statement is important because it summarizes the cash entering and leaving the business. It details cash flows from operating, investing and financing activities. A cash flow statement work in conjunction with an income statement and a balance sheet.

About 82% of small businesses reportedly fail because of problems with cash flow. Small businesses are often vulnerable to cash flow challenges, and understanding why this may occur canhelp business owners develop more-effective strategies to prevent these issues in the future.

Common challenges include (but are not limited to):

• Seasonality: Since cash flow can often fluctuate from season to season, it’s strongly suggested that new and small business owners develop strategies to ensure they’ll have cash on hand to cover operational costs during the slower times of year.
• Outdated bookkeeping: Out-of-date bookkeeping processes can often lead to errors and a lack of visibility into cash flow. In fact, 37% of chief financial officers believe their financial data is unreliable—an issue that can often lead to poor decision-making and cash flow problems.
• Outstanding receivables: Generally, not collecting all the payments owed can leave a business with a cash flow problem.

Once you understand why cash flow management is so important for small businesses, and what challenges to look out for, you’re ready to start developing a cash flow management strategy that fits your business’s needs.

Effective cash flow management can cover the typical day-to-day costs of running your small business. It can also put you in a position to look ahead to future challenges and investments. The following five tips are a great way to get started managing your small business’s cash flow more effectively right now:

Early adoption of technology may save small businesses time and money, and help ensure that your data is more reliable and actionable. Automated solutions can help small businesses optimize operations and manage cash flow more effectively. Tools that automate processes can provide valuable insights into financial metrics and reduce manual workload, saving valuable time.

To avoid potential issues, maintain a forecast of expected cash inflows and outflows. Revisit these projections periodically to challenge your assumptions with real-time data.

Typically, your cash flow forecast will use information from your cash flow statement such as:

• Estimated revenue
• Recurring expenses
• Historical financial data

For example, if your cash flow forecast projects $25,000 in revenue next month and $10,000 in expenses, you’re potentially in a cash surplus of $15,000. With this information, small business owners can better anticipate potential windfalls and shortfalls to ensure they have enough liquidity to cover operational costs at any given time. Regularly updating forecasts gives small business owners clearer and more accurate insight into their cash flow.

Evaluating expenses helps ensure you’re using your resources efficiently and responsibly. You can evaluate expenses by tracking spending patterns and identifying areas for cost reduction. Obtaining a business credit card may help you track expenses more effectively because they often provide detailed financial statements available month-by month.. Plus, many business credit cards offer rewards or cash back on purchases, which can enhance your overall financial strategy and help with budgeting.

For example, the Capital One Spark Cash Plus card lets businesses earn 2% cash back on every purchase without any limits or category restrictions.

Another way to improve the cash flow cycle is by implementing quicker invoicing. This can help businesses remain liquid. At the same time, incentivizing and encouraging early payments can also be a successful strategy for maintaining cash flow.

Keeping cash on hand for emergencies is essential for small businesses in order to help navigate unexpected challenges. However, it is just as important to keep cash on hand to take advantage of growth opportunities as they arise. With a cash cushion, small businesses have the chance to respond quickly and the flexibility to act.

Cash flow management is essential for small businesses to both sustain and grow their business. Understanding common challenges that small businesses face can help small business owners develop strategies to overcome them.

For example, leveraging technology to optimize bookkeeping or implementing iterative forecasting are two ways to immediately improve your small business’s cash flow management. Looking for more? Compare business credit cards from Capital One for the benefits and features that will give you a clearer picture of your business and help you make more-informed decisions.