Managing cash flow is very important for small businesses, especially those who are just starting. Basically, cash flow is the cash that goes into and out of your business. Positive cash cash that the amount of money coming in from customers or clients is higher than the amount spent. If the opposite happens, it means you need to improve your cash management before it’s too late.

Most common financial issues experienced by small business owners

7 Ways to Optimize Cash Flow Management for Small Businesses

Not keeping enough cash reserves

You should always have at least three to six months of working capital to prepare for unexpected circumstances, from non-paying clients to emergencies that need immediate maintenance

Not making financial planning

As the saying goes, if you fail to plan then you plan to fail. Your financial planning should include ways of overcoming the gap between incoming and outgoing money.

Forcing your small business to grow fast

You can be a victim of your own success. If you grow your business too fast, your cash flow will be tied up in up-front costs, in order to meet customer demand (while the product or service offered is not even ready yet). Therefore, it’s best to stick to slow but steady growth.

Not tracking your finances properly

It is very important to monitor incoming and outgoing money at least once a month, perhaps even weekly or daily if needed. By having a centralized document, it will be easier for you to see an overview of your finances as a whole.

Pricing your product or service incorrectly

If you charge too much, you will scare off customers. However, if you charge too little, not only will you not benefit, you may also have a hard time covering your fixed and flexible costs.

How small business owners can effectively manage their cash flow

7 Ways to Optimize Cash Flow Management for Small Businesses

1. Use a web-based accounting system

The most effective way of managing cash flow is to leverage a web-based accounting system. This system allows you to track your business cash flow anytime and anywhere in real time. By knowing your business financial position, you will be able to take immediate actions to improve your cash flow management, like increasing sales or collecting client payments when you have less cash coming in.

2. Evaluate the credit terms for clients / customers

Managing your customers’ credit is an important part of financial management. Get rid of unprofitable customers, those that cost more to maintain than they contribute to your bottom line. Flag those with a history of slow payments.

It is equally important to perform credit checks on new customers who apply for credit. If a customer has a history of slow payments, it may be necessary to change credit terms or even eliminate credit entirely. If you have to refuse a customer’s credit, make sure it is done wisely. Send a polite message letting them know you are unable to provide credit at this time and state why. Explain that they can transact in cash (you can even offer a cash discount to sweeten the deal).

3. Get paid on time

In order to get paid on time, you need to send invoices immediately. Delaying invoice delivery gives the customer the impression that you don’t care how long it takes for you to get paid.

Take action to encourage prompt payments, such as clearly stating payment due dates and sending notifications before bills are due (also for those that are already due). With the ClickWork accounting system, you can easily track the status of invoices and automatically send payment reminders to your customers.

4. Ask for an extension of payment terms

On the other hand, check the credit terms allowed by your vendors. Most vendors give 2 weeks to pay, but you may want to ask them to extend that timeframe to 30 days, so you can keep the money in your cash flow pipeline longer.

5. Delay investments until your finances improve

If you currently have cash flow problems, you should postpone investing until your finances are stable. Investing can be very tempting when your business is new. Perhaps you’re thinking about opening a new location or trying out a new, expensive marketing strategy. However, investing without sufficient funds and proper planning will only worsen your business cash flow.

6. Know the sources of your revenue well

You need to understand very well where the money you are making from. After knowing the best sources of your revenue, you need to prioritize these sources and retain them. Get rid of those that don’t contribute much to your income.

7. Analyze your expenses

To help manage cash flow efficiently, you should review your business expenses regularly. Use business management software to create reports on profit and loss, accounts payable and receivable, inventory management, balance sheets, and depreciation. Talk to your accountant or trusted financial advisor who can help you interpret these reports and decide what to do.


9 Small Business Cash Flow Management Tips for Business Owners