20 Cash Flow Management Tips for Small Business Owners

Large, small, new, well-established, public, private – nothing is more important to businesses than cash. Regardless of where a business is in its lifecycle or growth plans, cash is needed to pay employees, purchase raw materials, finance equipment needs, and market offerings. Effective cash flow management ensures that this lifeblood is working to support daily operations and long-term goals.

​Most business owners understand the basic principle of managing cash flow – expediting cash inputs while delaying cash outputs. However, many are overwhelmed by the nuances involved in each activity. Furthermore, some business owners are not aware of the additional strategies that can be utilized to manage cash flow at all levels of the organization.

Obtain Cash Quickly

1.  Immediately Invoice Customers

Invoice customers immediately for products and services and aim to receive payment as quickly as possible. Set invoices to be due upon receipt instead of offering NET-30 or NET-60 payment terms. For large projects or custom orders, require a deposit upfront to minimize the risk for doing business of this nature.

2.  Use Variable Pricing

Increase prices for customers that want more time to pay. Scaling pricing up proportionally with length of time to pay (for instance, adding 2% for NET-30 payment terms and 5% for NET-60 payment terms) encourages customers to pay more quickly to get a better rate.

3.  Formulate a Payment Policy 

A documented payment policy gives a business legal recourse when a customer is late paying or refuses to pay. After creating the payment policy, notify new and existing customers of its existence and adhere to it when quoting, invoicing, and collecting on past due balances.

4.  Facilitate Payments

Offer multiple payment options to attract more business and give existing customers more flexibility if their payment circumstances change. Offering a subscription service can also encourage timely payments for repeat customers while also increasing the average lifetime value of customers.

5.  Use Collections

Utilize collections measures (whether in-house or outsourced) to get paid by customers that shirk their payment responsibilities. Collecting on even a fraction of outdated accounts receivables can substantially increase cash flow.

Earn Bonus Cash

6.  Earn Interest

Keep cash in high-interest earning bank accounts to make existing capital work for the business. Be cautious, however, about locking funds into accounts to earn more interest. Keeping cash flexible is as important as using it to find better than average returns.

7.  Get Cash Back

Use cash back credit cards for business expenses. While points or miles-based credit card incentive programs can be lucrative as well, cash back credit cards are typically a wiser choice unless the business has specific travel needs that can be fulfilled using these types of cards.

Minimize Cash Outflow

8.  Use Direct Deposit

Pay employees using direct deposit to forgo the ongoing cost of checks. Most employees would prefer their paycheck to be directly deposited into their bank accounts anyways.  

9.  Pay Employees Less Frequently

Using a bi-monthly payment schedule instead of a bi-weekly payment schedule reduces the number of pay periods from 26 to 24, which saves on administrative costs. In most months this switch will not have any bearing on when employees are paid, but it saves money annually.

10.  Delay Major Purchases

Avoid buying office or warehouse space for as long as possible. Renting results in more predictable ongoing expenses, which typically generates better cash flow from month to month. If additional capacity is needed to scale operations, look for ways to do more with the business’s existing space by increasing efficiency first.

Similarly, repairing existing equipment instead of purchasing new equipment aids in cash flow management. Additionally, properly maintaining equipment from the onset can help to avoid repairs later and increase the useful life of business assets. When purchases need to be made to support business growth, opt for used equipment instead of new.

11.  Outsource Services

Professional services like accounting and finance solutions can be outsourced to reduce overhead. Using a third-party instead of hiring in-house allows a business to forgo employee-related expenses like employment taxes and job benefits.

12.  Use Free Software

Many of the types of software needed to run a business have low-cost alternatives or free versions that can be used until business operations become sophisticated enough to necessitate using the feature-rich paid versions.

13.  Pay in Trade

Depending on the type of goods or services, some companies may be willing to accept compensation in trade. Bartering is another way to reduce expenses while still utilizing cost-saving measures. Both allow businesses to obtain essential goods and services while reducing cash outputs.

Delay Payments to Vendors

​14.  Negotiate Terms

Requesting better terms from vendors, suppliers, and partners is the best way to delay paying for business inputs. The longer a business can wait to settle accounts payables after receiving payment for accounts receivables, the more cash flow it will have.

15.  Use Payment Allowances Advantageously

​Vendors and suppliers have their own cash flow to manage, which means that they may not be keen on extending longer payment terms. If there is no penalty for paying late, payments can be delayed on occasion to assist with cash flow if doing so will not strain the business relationship. This method should not be used frequently, however, or ongoing payment conditions may be altered to be less favorable.

Keep Cash Flexible

16.  Avoid Long-Term Investments

​Do not lock money into long-term investments. Keep a short time horizon on all investments to ensure ongoing liquidity. If there is a penalty for withdrawing money early cash flow can be restricted. Instead, invest in penalty-free CDs and other short-term investments.

Maintain Accurate Financials

17.  Rely on Financial Statements

Keeping timely financial records gives businesses the information needed to make shrewd, real-time cash flow decisions. Regularly maintained financial statements allow businesses to calculate available cash while financial projections help to estimate future cash. The result is better allocated resources and more prudent cash flow management.

18.  Forecast Accurately

Business forecasting relies on accurate sales estimates and predictable expenses. To achieve effective forecasts sales must be projected conservatively, otherwise cash shortages can result. Documenting ongoing expenses correctly is equally important to maintaining a positive cash flow because unpredictability can hinder cash flow, especially during key growth phases.

Obtain Financing

19.  Build Credit

Opening business bank accounts and charge card accounts and keeping them in good standing helps to build credit and preserve cash flow. Much like personal finances, business finances should aim to establish a pattern of credibility with lenders because being able to borrow money when needed is another key component to managing cash flow.

20.  Obtain a Loan

Getting a loan while the business is doing well and paying it back within the outlined terms improves a business’s credit report. However, when a business waits until it needs the capital to apply for a loan, lenders are less likely to advance money or offer favorable conditions.

​Since lenders want to be paid back, they are less likely to let a business borrow money for the first time if its future seems precarious. Lenders will look at accounts receivable, inventory, and equipment to determine whether a business’s profile looks healthy. Secure loans are then issued with terms that reflect the predicted risk level associated with these numbers. To prepare for getting a loan, sell old, obsolete, or excess equipment because cash is more valuable than equipment to lenders.

​If you need help with your accounting and bookkeeping, please take a moment to contact us here!