7 Tips for small businesses to manage cash flow

Cash flow – money coming in and money going out – is the lifeblood of any business. Understanding where the cash comes from and where it goes to can mean the difference between thriving and just surviving – or even going out of business. Here’s how you can best manage your cash flow. 

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.

Positive versus 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.

7 Ways to improve cash flow management

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

The fact that many businesses are being forced to work remotely right now could be saving them money. When employees work from home, you have less of a need for office items like coffee and supplies. 

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.

One popular way that businesses are generating income at this time is by asking customers to purchase gift cards at a discount. Cards purchased now can be redeemed after businesses are allowed to open their doors again. 

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.