Our Top Tactics for Small Business Cash Flow Management  

While a boost in new payments from customers or a bump in sales might seem promising, without healthy cash flow to reach your break-even point month over month, you won’t be able to turn a profit — let alone sustain your business for the long term.

Without positive cash flow, your small business is on borrowed time. In this post, we’ll explore the top tactics for effective cash flow management for a small business. 

1. Set up quarterly or monthly cash flow forecasts

A cash flow forecast is an estimation of your cash inflows (i.e. revenue sources) and cash outflows (i.e. operational expenses) over a set period of time. It’s vital to establish cash flow forecasts at monthly or quarterly intervals so you can conceptualize your cash flow situation or put another way, the money moving in and out of your business each month and where it’s going.

These cash flow projections are essential for understanding the health of your business (or lack thereof). After all, as the saying goes, you simply don’t know what you don’t know. Recurring cash flow forecasts illustrate how money will enter your business through sales, subscription services, and affiliate marketing and exit your business through inventory, taxes, business loan and debt payments, and other overhead costs.

Beyond getting a handle on elements like your income and burn rate or the pace at which you’re spending your money, recurring cash flow forecasts help prepare for big capital expenditures and potential market shifts that are out of your control. As it stands, nearly half of small business owners are now reevaluating cash flow due to inflation. While you can’t predict inflation, you can prepare for it in advance by having a solid grasp of your cash balance.  

Imagine you failed to estimate cash flow for the month and spent $10,000 more than usual on expenditures like garment printers. Even with a profitable quarter, you may not be able to afford your typical expenses — like rent and payroll — because you didn’t account for the amount of money that would be moving out of your business. Cash flow forecasting could have prevented this.

2. Establish a cash reserve

Cash reserves are funds that small businesses set aside in the event of an emergency or unexpected expense. Regarding managing small business cash flow, cash reserves are like a safety net that can cover your business operations, keep employees paid, and ensure you pay loan payments/debt repayments on time. 

Cash reserves are imperative to small businesses because they help keep the lights on, even if sales suddenly drop or daily operating expenses skyrocket overnight. It’s wise to reserve at least three to six months of operating expenses, though the average small business holds 27 cash buffer days in reserve.

While monthly operating expenses vary across industries, a survey of more than 600,000 small businesses found that the average cash reserve is $12,100. However, more elaborate manufacturing small businesses have over $34,000 on hand to maintain operations despite unplanned snags.

For instance, say you’re a small ecommerce business that primarily sells via Instagram and Facebook, but both apps crash for multiple days, rendering your sales down to zero. A cash reserve can help maintain your daily operations, even without the incoming cash from product sales.

3. Make sure to have access to credit lines

While cash reserves keep your operations agile, it’s unrealistic to assume that every small business can put aside tens or hundreds of thousands of dollars for a rainy day fund. So, make sure your business has access to credit lines, like bank loans and credit cards. In the year ahead, 82% of small business owners plan to obtain some type of credit from credit card companies for their business, up 12 percentage points from last spring.

Small businesses can benefit from less costly forms of credit, like low-interest bank loans when first launching and paying any required license and permit fees. If a loan is not an option or not exactly necessary for your current situation, a business credit card can also help cover short-term expenses.

Plus, many business credit cards offer cash-back bonuses, which can equate to hundreds or even thousands of dollars back, depending on what’s spent. This can be an added bonus assuming you aren’t incurring higher than normal costs in the form of ongoing high-interest credit card debt. 

4. Stay on top of overhead costs

Nearly 9 in 10 small business owners say inflation is affecting their businesses, as per Bank of America’s 2023 Small Business Owner Report. Now, more than ever, it’s crucial to stay on top of overhead costs — many of which are rising — to manage cash flow for your small business.

In terms of rising overhead costs to be wary of, fellow business owners report concerns about:

• Interest rates (67%, +10 percentage point increase from 2022)
• Healthcare costs (61%, +4 percentage point increase from 2022)
• Corporate tax rates (52%, +3 percentage point increase from 2022)

By staying on top of overhead costs, particularly with a monthly or quarterly cash flow forecast, you can be more proactive about managing your business’s money. If you can reasonably anticipate your overhead costs month-to-month, you can have more lead time to seek credit lines if necessary.

For example, you might receive notice that your office rent and employee healthcare costs will rise in the new year. When you stay on top of these overhead costs, you can apply for a low-interest bank loan, find alternative office space, or seek new insurance plans before both costs increase at once.

5. Minimize expenses where possible

With overhead expenses slated to rise across the board for small business owners, another tactic to manage cash flow is by minimizing expenses where possible. Get in the habit of reviewing your cash flow statement each month. Then, reduce your outgoing cash flow whenever possible by removing subscriptions you no longer use, negotiating payment discounts on bulk orders with long-term uppliers, etc.  

Another strategy to minimize expenses is leveraging automation for tasks that would otherwise require outsourcing the labor or hiring a new employee. As per recent research, more than a quarter of small business owners are now using automation to replace tedious, manual tasks.   

6. Improve inventory management

Speaking of managing inventory, an often overlooked tactic for managing small business cash flow is improving your inventory management. Inventory management involves optimizing the ordering, storage, and selling of goods, as well as the movement of raw materials to finished products.

Inventory management is important to a small business for several reasons. One is the ability to maximize raw materials and minimize waste, getting more value for each dollar spent. Another key reason is to avoid ordering more than necessary to reduce excess stock or idle inventory. 

Carrying costs, or the expenses related to holding excess inventory levels at a distribution center or warehouse, including storage, handling, transportation, and depreciation costs, can equate to 20% to 30% of total inventory value. This amount only increases the longer excess inventory is held.

Between using dedicated inventory management tools and creating a cash flow forecast, you should be able to predict incoming sales based on previous data so you can order what you anticipate selling. If you fail to establish a forecast — or refrain from using inventory management software — you risk ordering far too much stock and raising your overhead.

7. Limit equipment costs

Another tip to not only manage cash flow but also minimize unnecessary cash flow issues is to limit equipment costs. For most small businesses, this involves leasing your business equipment rather than buying it outright, allowing for smaller monthly payments rather than large upfront purchases, which can lead to a cash crunch.  

Limiting equipment expenses by leasing machinery or hardware helps minimize the short-term impact on your small business cash flow. Plus, by avoiding total ownership, you can update your equipment based on business finances or customer demands without needing to resell the old stuff.

Right now, 31% of business owners are reducing business costs to future-proof cash flow, and equipment can be a great place to start. For instance, a $200 monthly payment on an industrial sewing machine is more manageable to balance than a $10,000 purchase that sinks your burn rate.

8. Prioritize accounts payable

While you can limit your small business expenses, you can never fully eliminate your accounts payable (AP), like inventory, payroll, and web hosting costs for an ecommerce brand. So, a smart way to manage your business cash flow is to prioritize your financial obligations.

Prioritizing your accounts payable is wise because paying every invoice or bill simultaneously at one time of the month can put a significant strain on your cash flow, especially if you have high expenses. Small business owners identified damaged vendor and supplier relationships, delayed delivery of goods or services, and stress on accounting teams as challenges of poor AP processes.

Instead, good financial management means negotiating special financing options that are more favorable to you whenever possible and prioritizing AP by invoice due dates first and interest rates second. For example, if the current date is July 1, pay the bill due on July 3 before you do the one due on July 15. Next, prioritize bills like credit card statements by due date and interest rate, paying the card with the highest rate first.

9. Optimize accounts receivable

Beyond accounts payable, you can safeguard your cash position by optimizing your accounts receivable or the money that flows into your business. The sooner you get paid from outstanding invoices, the faster you can pay your expenses and the quicker you can reach your break-even point to achieve a positive cash flow.

To optimize your accounts receivable, it’s beneficial to send invoices in a timely fashion and, more importantly, implement clear payment terms in advance. In 2022, almost 9 in every 10 small business owners reported that their invoices were typically paid 15 or more days past their due date, with the majority saying late payments had become more severe since 2021.

So, it’s no surprise that poor cash flow management and late payments were the leading causes of small business failure. To protect your business (and your cash flow), deliver invoices as soon as possible after a transaction. If you want to get paid within the month, account for late payments and establish 14-day payment terms.

10. Reconcile your accounts 

Cash flow should remain fluid, but that doesn’t mean that expenses should trickle through the cracks. When negative cash flow is not accounted for, not only will your books be off balance, but you may assume that you have more cash on hand than you truly do, risking putting yourself in a cash crisis. 

These risks are why bank account reconciliation is so important to maintaining proper cash flow for a small business. Bank reconciliation is a process that compares two sets of records, like your chart of accounts, to your actual bank statements to ensure that all transactions are properly recorded in your accounts.

Most small businesses leverage reconciliation to prevent errors on the general ledger; however, they also use it to check for potential fraud. At a time when small business owners’ biggest concerns are payment fraud, like unauthorized transactions or unauthorized electronic fund transfers (44%) and malware and ransomware attacks (28%), reconciliation is a form of preventative maintenance.

For example, imagine that a malicious actor used a falsified payment method to make a large ecommerce transaction. The transaction was recorded in the income statement, but the payment was later denied. Without reconciliation, that amount may incorrectly show on the general ledger.

11. Use cloud accounting software

The above tips are all helpful for managing small business cash flow, but you can simplify — and begin to scale — your cash flow with dedicated accounting software. From paid QuickBooks or Xero subscriptions to free Zoho plans, accounting software uses graphs and charts to illustrate how funds move in and out of your business. Plus, they can keep track of future cash flows. 

Right now, 90% of small business owners say digital tools make their businesses more efficient, with 53% using software to manage cash flow and 48% planning to use automation to streamline payroll and bookkeeping. Adopt tools in your small business to simplify cash flow management.

12. Remain mindful of tax obligations

Last, but certainly not least, it’s vital to remain mindful of tax obligations. In 2023, more than half of small business owners were concerned about rising corporate tax rates, a 3% increase from the year prior. By not making estimated quarterly tax payments, paying your returns late (and incurring penalties), and failing to maintain your books, taxes can put a significant strain on your regular cash flow.

To stay on top of tax obligations, utilize cloud accounting software and a dedicated accounting firm to maintain accurate accounts and automatically track expenses like sales and payroll tax. By monitoring these details throughout the year, you can avoid a surprise bill that drains your cash reserve. For example, software can estimate your taxes owed, so you can save enough cash on hand to pay in full and avoid penalties or interest.