All You Need to Know About Managing Your Small Business Cash Flow

A pile of money with a click in the background representing cash flow

You may not know it yet, but managing small business cash flow is a major milepost in your epic entrepreneurial journey.

What is that exactly? It’s a set of practices that help track, analyze, and improve your small business’s financials. Learning how to manage your funds means you can organize your priorities, grow your business, and pay your league of knights.

This needs the careful strategization and preparation of a great hunt that doubles as a coming-of-age ceremony—one that could really make or break you. If you aren’t prepared for the hunt, well, you might end up being the hunted. You know what’s scarier than a wild boar, tiger, or even the taxman? Taking out loans for a failing business, getting a succession of endless calls from creditors every day, and ultimately, chewing your fingernails off.

Don’t worry. We won’t let this worst-case scenario happen to you because we are your loyal squire on this journey. Seriously, there are tons of easy ways to manage small business cash flow. We’re in this epic quest together, so let’s learn about the fundamental building blocks of operating your small business. At Alchemy Accounting, we’re all about learning, so let’s get to it!

Get the Green Machine Going

You’ll need to get to know the two types of cash flow: positive and negative on this adventure. Maybe you already have an idea of what that means, but let’s break it down for those who don’t.

Positive cash flow is when cash flows into your business through sales, accounts, and receivables and is greater than the amount leaving your business. Negative cash flow is when the outflow of cash is greater than your income, which we want to avoid. This is why you want to analyze your inflow and outflow to ensure your business has enough to cover costs and sustain itself.

Note: just because you make a profit doesn’t mean it’s a positive small business cash flow. Let’s remember that profit means revenue, minus the expenses. There are many things to consider regarding cash flow, such as inventory, accounts receivable, accounts payable, capital expenditures, and debt services, among other things. And just because a small business grows, that doesn’t mean you’ll see a positive cash flow. In fact, a growing business typically eats up profits.

Check earnings against your break-even point because money can still get tight—kind of like when you’re rounding the bend with your gallant steed in search of treasure. We suggest making a cash flow chart to visualize how your money should be dealt with.

By managing certain factors like accounts receivable (what you are owed by the customer), accounts payable (what you owe to the suppliers), and shortfalls (the amount of money you owe that exceeds available funds), you’ll increase your financial success while managing a small business. The key is balance. You don’t want to owe tons of money to suppliers or have clients owe you. Find the middle ground.

No B.S. Guide to Managing Cash Flow in Business

As with any voyage, there will be new perils to overcome. Managing small business cash flow might be brand new, and you might be wondering—so what should I do to sustain a positive cash flow?

There are tons of adjustments you can make to improve your cash flow management. This isn’t going to be an effortless miracle, like wishing upon a star. It will take time and effort to slay this dragon. Let’s set out on this voyage with the tools you’ll need. Follow us.

Business is a Category

This ain’t personal, buddy. As you would keep your business separate from your personal life, you need to do so with your accounts. Start by setting up a business account at the bank, unrelated to your personal account.

Let’s say you’ve finally decided to venture into ceramics featuring hand-painted quotes from Star Wars. As a startup, you may use personal savings as your initial funds. However, using a business account will allow you to apply for business credit cards. We don’t want you to start maxing out this card with spa days or hardware tools. But you may be eligible for reward points that can be used for travel or business purchases—like tickets to Comicon so you can really get some “In a galaxy far, far away” inspo. Using a business account is super useful because it categorizes your purchases and creates management reports, making it easier to track your expenses for your small business cash flow.

Voice Your Invoice

Before taking on a client or supplier, set clear expectations for when payments are required. Communication is essential in relationships, and that goes for business relations as well. If you’re working on a resource-heavy project, ask for an initial deposit to cover the necessary expenses. Once you deliver the task or project, send out an invoice with all the necessary details.

When designing your invoice, make it as straightforward as possible, including due dates, amount due, who and where to send payments, and the payment method. An even better idea is to email the invoices so there is no chance it’ll get mixed up in the mail (we do live in the future, so digital is the way to go). Don’t procrastinate on this! You can always use accounting software if you need a hand.

Get A Smooth Operator

Keeping your eyes on the prize is not easy. You’ll have to battle giants and outwit evil villains. Along the way, you might lose sight of where you need to go. That’s where you’ll need a trusted companion, like a Samwise Gamgee, Ron Weasley, Yoda, or Alchemy Accounting. Have a trusted employee or accounting firm stay on top of cash flow management. With the extra attention to reports, you’ll be able to strategize and improve your cash flow. Not only that, you’ll stay up-to-date on your numbers, which will help you make the right decisions before you find yourself in a real pickle. Designate your MVP of the year. This person will genuinely make managing a small business a breeze.

BFF Automated Accounting

Have you considered using online accounting software? This has come up time and time again, and if you know us, you know we’re the biggest cheerleaders for automated accounting. It can make your life so much easier—like taking down the evil prince with a sword instead of a toothbrush. Stop punching numbers in a spreadsheet. We recommend using automated accounting tools to get more accurate and secure data you can access anywhere in the world. Make your life simpler. And if you don’t trust the machines, have the pros do it. Have people like us at Alchemy Accounting. That’s what we’re here for.

Money Here, Money There

Have you been able to cut down costs? We’re not saying cutting corners. However, we do say cut costs like it’s a beanstalk with a giant coming for you. When reading your monthly or quarterly expenses, determine if there was unnecessary spending.

For example, was there an exceptionally unreasonable electricity bill due to the air conditioner blasting throughout the year? Or how about that Adobe subscription service for all their programs when your small business only uses two or three? Did you overspend on your outfit for the ball? If that is the case, perhaps it’s time to reevaluate your finances. Consider the possibility of renegotiating the terms of outstanding loans—there’s bound to be something that’s being underutilized. Perhaps look into subscriptions that can be canceled out. In addition, if you have equipment you no longer need, why not sell it for some extra cash? Liquidate your assets, as applicable. Or here’s another thought, lease it out. Money is everywhere if you just look hard enough.

Here’s The Deal

A quick and effective way to boost sales is by offering promotions. This could range from a customer loyalty program to running a contest. Not only will you build your clientele, but you can also really utilize social media in a meaningful way. You can also clear out inventory or old stock at discounted prices to help grow sales. Besides, not only is it collecting dust, your products could be depreciating as time goes by. For those of you who run small businesses that are more project-based, you can still offer different types of deals. If you get more jobs than you have the capacity for, why not offer a discount to clients who are willing to receive their project at a later date? With a little bit of innovation, you can discover lots of ways to rake in the moolah.

Get Frisky, Not Risky

You’re managing a small business, so we know you are up for a little adventure. There’s bound to be risk in business, but how do you prepare for that? Maybe you make hand-crafted toys, and a super-rich philanthropist orders 500 stuffed dolls for a local hospital’s children. As generous as this sounds, you come to learn that he made a mistake, and rather than 500, he intended to order 50. It’s a costly mistake, and the client no longer wants to pay, although you’ve already made the deliverables.

This is why risk analysis is an essential part of cash flow management. Using your accounting software, accountant, or antiquated spreadsheet to enter cash inflows to reflect this hypothetical situation is critical. Then, you can delete or add inflows as required. This process will allow you to see the effects of the issue within the weeks or months that follow. You can’t simply follow the breadcrumbs and expect to end up at Grandma’s house. There are big, bad wolves lurking throughout the forest. Knowing there are many risks involved in accounting, be sure to create your cash flow forecasting to test them out.

When It Rains, It Pours

Always have an emergency cash reserve, preferably one that isn’t hidden under the mattress or in a tomb guarded by the undead. Like an emergency fund you have for your personal life, your business needs one too. Unfortunately, many small business owners have learned this as of late (pandemic and all y’know). The unpredictable happens. Save up at least 3 to 6 months’ worth of expenses, if possible. That’s why small business cash flow management is so important—so you can find those reserves and put them away before the storm comes in.

Now You Know, The Cash Money Flows

Congrats, you’ve read through this entire article, and you’re ready to level up on your small business journey. We get it, you have a lot going on, and it’s easy to forget the little things—like misplacing keys, forgetting to take clothes out of the dryer, or the magical words that break the spell. But managing small business cash flow should not be on that list.

There are so many things that go into running a small business and managing cash flow is only one piece of the puzzle, so be sure to use all the resources you can. Whether it’s delegating to an employee, automated accounting tools, or asking the professionals at *ahem* Alchemy Accounting for help. These things need to get done, or you’ll never save the idiot prince from the tower.

Finances should be treated with care—it enables you to indulge in raspberry macarons from your favorite bakery, as well as your much-needed Netflix subscription. We want you to enjoy the simple and/or finer things in life. That requires understanding the tools needed to conquer the trials and tribulations of your financial journey. We wish you only the best kinds of financial wellness! Take our 4-minute Financial Foundations Quiz to discover how you can improve your small business cash flow.

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Michelle Cooper

Michelle Cooper is a powerhouse entrepreneur, CEO of Alchemy Accounting & Bookkeeping, author of Confessions of a Money Rock Star, Your MoneyDate Journal, and co-author of the collaborative book, Women Rising. She has helped many business owners climb out of entrepreneurial poverty into the land of profit.