7 Tips for small businesses to manage cash flow

Cash flow management is the practice of tracking and controlling the money moving in and out of your business so you can always cover expenses like payroll, rent, and vendors—even when customer payments are late. Small businesses can improve cash flow by monitoring finances with software, leasing instead of buying, extending vendor terms, rewarding early customer payments, leasing out idle equipment, and outsourcing non-essential roles.

In this Article:

• What is cash flow management?
• What is the difference between positive and negative cash flow?
• How can a small business improve cash flow? 
• Frequently asked questions

What is cash flow management?

Cash flow is the movement of funds in and out of your business. Typically, money comes in from customer payments and goes out for expenses like materials, payroll, and rent. Good cash flow management means being able to adapt if there’s a disruption in your cash flow. For instance, even if your customers are late in paying you, you should still be able to run payroll and pay your vendors on time. This is an issue for many business owners, but there are things you can do to mitigate it.

When the unexpected happens, having good cash flow management will help you stay on your feet.

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What is the difference between positive and negative cash flow

First, let’s cover some basics. Positive cash flow is money coming into your business, such as sales and accounts receivable. Negative cash flow is fixed expenses like payroll and rent. 

One important thing to remember is that having a lot of revenue does not necessarily equal good cash flow. If you have high fixed expenses, such as rent in an expensive city, your revenue will quickly dwindle. Good cash flow management is the ability to assess your finances so you can pay all of your business expenses on time.

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How can a small business improve cash flow?

1. Use software to monitor finances

To make it easier to check in on your business finances regularly, look into software like QuickBooks for the self-employed and small business owners. Having consistent oversight of your finances can improve cash flow management.

2. Rent rather than buy

Say you’re the owner of a landscaping business. This line of business requires that you have some expensive machinery. A tractor can cost thousands of dollars. If you buy one outright, you will have a chunk of change tied up in that piece of equipment for a while before it pays itself back. But if you lease it and pay for it month over month, it will help you sustain positive cash flow.

3. Remote working

When roles can be done from home, remote or hybrid work can reduce overhead—less spend on office space, utilities, and supplies—freeing up cash.  

But on a larger scale, if you have certain roles that don’t require the employee or even a team to be in the office, a good way to save money is to have them work remotely. With fewer people in the office, you will have less overhead when it comes to rent and office supplies.

4. Extend net terms with vendors 

If you’re forecasting that you will be tight on cash for the next month, talk to your vendors about extending the time you have to pay them; see if you can stretch it from 30 to 60 days, for example. Just make sure they won’t charge you late fees. Otherwise, this strategy won’t be worthwhile.

5. Offer discounts to customers for early payment

For service-related industries, consider giving customers discounts if they pay you quicker. Let’s say you usually allow 30 days for customers to pay their bill with you, however, you may be able to give them an incentive to pay sooner by offering a discount.

This allows you to collect accounts receivable faster and roll it into running payroll, accounts payable, or any other expenses you have.

Selling gift cards or prepaid packages is a quick way to bring cash in now for products or services delivered later.  

6. Lease unused equipment 

If you have invested in expensive equipment specific to your industry, consider leasing it out when it’s not in use. Customized vehicles like bucket trucks and cherry pickers, or even audiovisual equipment, are sought-after items that you can lease out. You can then use the extra income to help cover other business expenses. 

7. Hire freelancers or contractors

If you have certain roles that aren’t full-time, consider using either a freelancer or contractor. For instance, if your billing department is small and you need someone to run payroll and accounts payable once every two weeks, consider hiring someone as a contractor so that you only pay for the hours you need.

Or, if you’re thinking about getting into inbound marketing to drive more traffic to your website, you may not need to hire a full-time person just yet. Hire a freelance writer who can write blog posts for your company on a bi-weekly basis to get the ball rolling. 

By outsourcing work to contractors and freelancers, you don’t lock yourself into paying a full-time employee and all of the associated onboarding and benefits cost. 

Thinking about protecting your business with insurance? Check out our blog post: Why you need insurance for coverage for your small business.

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Frequently asked questions

What is cash flow management?

It's the process of monitoring and controlling the money entering and leaving your business so you can meet expenses on time.

What is the difference between cash flow and profit?

Profit is what remains after expenses over a period; cash flow is the timing of money actually moving in and out. A profitable business can still run out of cash.

How can I improve cash flow quickly?

Invoice promptly, offer early-payment discounts, extend vendor terms, lease instead of buying, and cut non-essential overhead.

What is a healthy cash flow?

Generally, consistently positive operating cash flow (more coming in from operations than going out) so you can cover obligations and reinvest.

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