Cash flow management for small businesses is one of the most important tasks for a business owner. Effective cash flow management can protect you by determining if you have enough funds to cover daily operations and helping your business become sustainable. 

Without proper cash flow management, even profitable businesses can be prone to facing obstacles.

This article will explain what cash flow management is and why it’s important. We will also explore 10 simple ways to manage cash flow and ensure your business remains financially sound.

Table of Contents 

• What is cash flow management?
• Why is cash flow management important for small businesses?
• 10 tips on how to manage cash flow
• 3 types of cash flow problems
• Make cash flow management a priority
• FAQ

What is cash flow management?

Cash flow management refers to tracking the inflows and outflows of cash within your business. This practice helps you determine when cash will be available and forecast whether you’ll have adequate finances to pay for expenses such as staff wages, rent, and inventory.

Knowing your business’s cash flow can help you avoid financial pressure, maintain liquidity, and take advantage of growth opportunities.

Why is cash flow management important for small businesses?

For small businesses in Canada, managing cash flow is essential due to the country's changing economic conditions, tax regulations, and inflation rates. Access to financing may not always be feasible, making efficient cash flow management necessary for a business to be sustainable. 

Businesses should focus on having positive cash flow over the long run so they can cover expenses and expand in the future. It’s equally important to anticipate if there will be negative cash flow — which will cause financial stress over time — and take steps to mitigate it.

Solopreneurs, in particular, must focus on cash flow since they often handle all aspects of the company on their own.

10 tips on how to manage cash flow 

Here are 10 effective ways for businesses to manage their cash flow.

1. Create cash flow forecasts

A cash flow projection helps you estimate the amount of cash that will enter and exit your business over a specific period. You can also look at historical sales data to identify patterns and trends. By forecasting, you can plan for slow months, determine when to cut costs, or boost your marketing efforts when your revenues increase. 

2. Manage your inventory

If your business requires you to hold onto inventory, it’s essential to manage it effectively. For example, overstocking ties up your cash in products that may take weeks or months to sell, while understocking could hinder your sales. It can be tricky to find the right balance. You may want to experiment with various inventory management techniques to assist in managing your stock levels.

3. Invoice promptly and accurately

To ensure that your cash flow is well maintained, implement a speedy and accurate invoicing process. After all, the longer you wait to send invoices, the longer it takes for clients to pay, which can leave you cash-strapped.

Here are several ways to manage this: 

• Send invoices as soon as your products or services are delivered.
• Clearly explain the payment terms and outline penalties for late payments.
• Use online tools to automate the invoicing process.

4. Shorten payment terms

Long payment terms can cause delays with cash inflows, affecting your liquidity.

Instead of offering 60- or 90-day payment windows, consider shortening it to 30 days.

You could also offer incentives for early payments. For example, giving 2% off for payments completed within 10 business days encourages customers to pay off their outstanding balances early.

5. Align payment and collection terms

Ensuring that your payments to suppliers align with when you collect customer payments can help prevent cash shortages.

To do this, you’ll need to negotiate the payment terms with suppliers to extend payment windows. This ensures you have ample time to collect money from your clients before your own payments are due. 

6. Control your costs

Reducing unnecessary expenses is one of the easiest ways to improve cash flow. Incorporate ongoing reviews of your operational costs, such as office supplies, marketing materials, or utilities. Then, eliminate any costs that aren’t essential for running your business.

Also, review contracts with suppliers annually and negotiate better rates — or switch to another vendor who offers competitive rates.

7. Build an emergency fund

Slow-paying customers or unforeseen expenses can throw a wrench in your cash flow. Building a cash reserve can help protect your business from these uncertainties. Being able to set aside a percentage of your revenue each month as an emergency fund will give you a safety net to rely on during times of need.

The general guideline is to save 3 to 6 months’ worth of operating expenses for a cash cushion to prepare for potential financial setbacks.

8. Use financing options wisely

Short-term loans and lines of credit may provide some relief during cash flow gaps. Just be sure to use these financing options carefully and avoid high-interest payments or uncontrolled debt.

An ideal way to use financing is when you need to purchase expensive machinery or equipment. This way, you can reserve your cash flow for operating expenses.

9. Track your cash flow regularly

Use analytical tools or dashboards to track your cash flow daily, weekly, or monthly. You can spot early warning signs and take proactive measures by monitoring your current cash flow situation.

Tools such as QuickBooks can provide real-time insights into your financial health.

10. Leverage automated cash flow tools

Managing cash flow manually may feel overwhelming. Fortunately, there are many advanced tools that can help streamline cash flow management. These tools provide insights into cash inflows and outflows, create cash flow reports, and make projections to better equip you for upcoming business activities. 

According to a survey by Canadian Western Bank, the top three reasons for a business to invest in new software solutions are:

• Improving productivity (32%)
• Managing and analyzing data better (30%) 
• Creating efficiencies (28%)

3 types of cash flow problems

It’s typical for business owners and self-employed individuals to face cash flow issues when implementing numerous strategies.

Here are 3 common cash flow issues that may arise.

Seasonal changes

In Canada, many small businesses experience seasonal highs and lows. For example, retail businesses may see higher sales during the holiday season, while landscaping companies may have peak seasons in the summer.

To manage these periodic shifts, ensure you plan ahead for off-season expenses.

Economic downturns

Job lay-offs and decreased consumer demand can cause economic uncertainty. During recessions or periods of low consumer spending, businesses may find it more challenging to generate consistent cash flow. As a result, this may lead to businesses feeling less confident about their future outlook. 

Delayed payments

Chasing after customers to pay their invoices can cause gaps in cash flow. However, implementing firm payment terms and offering discounts for early payments can help alleviate this issue.

Make cash flow management a priority

Cash flow management for small businesses is a process that requires ongoing attention. By implementing tips on managing cash flow, solopreneurs and small business owners can ensure they have sufficient cash to operate smoothly, navigate financial uncertainty, and expand their businesses.

Whether you’re forecasting your finances, sending invoices on time, or negotiating better payment terms, every action you take counts toward a healthy cash flow. Take charge of your cash flow to ensure your business thrives in an evolving marketplace.

You can benefit from financial reporting and cash flow statements to keep track of your finances. Improve your cash flow management today with QuickBooks Online.