Take Control of Your Business’s Cash Flow

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Millions of people hope to become entrepreneurs one day and later make that dream a reality: There are currently more than 33 million small businesses¹ in the U.S., with a record 5.5 million applications in 2023. Starting a new business takes a healthy combination of grit, ambition and resilience. It also takes working capital and solid cash flow management.

Here are six cash flow management strategies that can help you build a long-lasting business:

1. Get a holistic picture of your business’s financial health. First, it’s crucial to understand your business’s current assets and liabilities. To get an accurate picture, you need to know your current sales and revenue and any cash savings, as well as liabilities such as expenses, tax and debt obligations. It’s also a good idea to understand trends in your business. For example, many businesses experience spikes and lulls during certain times of the year, so you may have more or less cash on hand during different seasons.
    
   Look through your records, gather all the relevant information and carefully track it to get a better handle on your business finances. From there, you can make more informed decisions about how to use your working capital and when and where to invest to grow your business.

 

2. Track and audit your inventory. Inventory is usually one of the biggest expenses for a business. That’s why proper inventory management is so important. It will ensure you keep the right amount of product in stock, avoid purchasing excess inventory that can be hard to sell.
    
   You can tackle inventory management in several ways. You could maintain a spreadsheet or use software to determine all the items you have in stock. Next, regularly audit your inventory to assess which items sell through and which don’t, and then adjust your ordering practices accordingly.

 

3. Strengthen your accounts receivable and payable process. Strengthening your accounts receivable and payable processes can improve your business’s cash flow.
    
   Receivables, or incoming payments, can have a big impact on your cash flow if you have several outstanding unpaid invoices. To encourage customers to pay on time, consider offering a small discount for early payments or for using payment methods such as cash or check, which can help you reduce processing fees associated with credit card payments. You also might consider offering electronic payment options to streamline the process for customers.

   Payables, or payments to suppliers, also affect your cash flow. This is where negotiating flexible payment terms with vendors can make a big difference. You could ask for extended payment terms (for example, 60 days instead of 30 days), discounts for paying early or signing a longer-term contract, or ask about moving your payment due date to time of month that best aligns with your cash flow.

 

4. Use technology to streamline the process
   Managing your financial operations manually is time consuming and opens room for error. Instead, use technology to gain more visibility into and control over your finances. Cash management tools allow you to view your business account balances and transaction activity anywhere and anytime from a phone or computer. You can also initiate payments between your account and external accounts, and make check deposits without visiting a brick-and-mortar bank. Such tools also provide easy access to information for business forecasting, cash flow projections and other future planning. It’s important to always make sure all online accounts are secure. Consider setting up multi-factor authentication to mitigate risk.

 

5. Build a rainy day fund
   Every business owner experiences fluctuations in sales throughout the year, but having solid cash reserves can help you better navigate these shifts.

   SCORE, the country’s largest network of volunteer, expert business mentors, recommends setting aside three to six months of operating expenses, but notes that amount can vary depending on the stage of your business.² To determine how much you should set aside, review your business’s cash flow reports and anticipated future expenses, such as staffing, equipment or inventory purchases.

   If you’re an established business, you’ll likely have access to more cash flow data and better insight into your monthly revenue and expenses. For many small businesses, the ideal amount of cash reserves can range from a few months to even a year of operating expenses. Do the math and determine which number makes the most sense for your business.

   Maintaining insurance for your business is as important as keeping a rainy day fund. All sorts of unexpected events can arise, from property damage to lawsuits, that could jeopardize your business if you don’t have the funds or coverage to rectify the situation.

 

6. Maintain good credit Good credit also is an important — though less frequently discussed — part of effective cash flow management.
    
   Paying your bills on time, not taking on too much debt and having enough cash reserves will allow you to build a good credit profile. This will make you a more attractive borrower to banks and other lenders and can help you qualify for a loan or line of credit when you need one. Access to these emergency funding sources can provide another financial safety net during economic downturns or other unforeseen disruptions that might affect your operations.

The key to better small business finances

Opening a small business offers the opportunity to build something of your own and contribute to your community. It’s a rewarding experience but also requires hard work, especially when it comes to handling your finances.

Effective cash flow management is a skill every small business owner should master, because it’s one of the best ways to build a resilient business that thrives for years to come.

 
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