5 Keys to Managing Cash Flow for Small Businesses

Managing finances as a small business owner likely can feel like an endless juggling act. Without a solid handle on cash flow, a business can quickly slip into quicksand: invoices piling up unpaid while bills and operational costs continue rolling in - it's easy for things to snowball.

If this sounds like you, consider this your insider guide to mastering the money game as an SME. Read on!

Cash flow 101

Cash flow is simply the pattern of money coming into and going out of your bank account over a period of time. A healthy cash flow is just like a running stream; money flows in (and can flow out) without blockages or obstacles.

Most importantly, healthy cash flow depends not just on sales, but also on collecting payment efficiently from customers and managing expenses wisely.

This is why on “paper” you can have significant profits but this is not necessarily reflected in your bank account, one of the many reasons why profits do not equal positive cash flow.

When revenue consistently exceeds expenses, you’re able to not only operate smoothly but also invest back into growing your business. Think of profits and excess inflows as fresh streams feeding into your central business "pond," keeping oxygen and nutrients circulating to stimulate growth.

#1: Set Advance Payment Terms (if you are offering a service)

For the service providers out there: would you do the work knowing you wouldn’t get paid for it? No? Didn’t think so. So why would you take the risk?

(For the product-based businesses, such as e-commerce, this isn’t so relevant as you will likely take payment before delivering the product. However, you will be more impacted by inventory spending, so sections #2-5 will still apply to you.)

If your business model and standard practices within your industry allow it, get your clients to pay in advance. While advance payment could (less frequently) mean requiring your customer to settle 100% of the bill before you start work, it is more common to require partial upfront deposits and milestone-based instalments.

If you still have not implemented advance payment terms, you risk:

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• Never being paid for work you’ve already put significant time and cost into
• Exposure to your customer’s financial issues (e.g. they can no longer pay you for work already done due to cash flow issues, or even insolvency or dissolution)
• Spending money hiring staff (employee or outsourced) to chase invoice settlements – once work is already completed, customers could be less incentivised to pay

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Setting reasonable advance payment arrangements align customer inflows with important working capital outflows.

#2: Incentivise Customers to Pay Quickly

Even if you are unable to implement advance payment terms, you can still incentivise customers to pay quickly. Do so by:

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• Ensuring payment terms and due dates are clearly communicated up front before undertaking work
• Gently following up at set intervals after due dates via automated invoice chasers (this is a common feature offered by major accounting software products)
• Offering small discounts for early or on-time payments

#3: Create Detailed Cash Flow Forecasts

Cash flow forecasts outline projected cash inflows and outflows quarterly or monthly. Many businesses – perhaps yours too – go through cyclical or seasonal changes in both supply and demand. Forecasting can reveal busy periods where more staff may be required or prompt businesses to offer payment incentives to clients.

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And don’t just create forecasts and file them away – actively review cash positions often, using real figures. Compare projections to actual results, and make revisions to forecasts as needed. Unexpected events can easily alter finances, so frequent check-ins are a must. Something as simple as an annual insurance premium renewal that was forgotten could strain cash reserves if unaccounted for.

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#4: Implement Accounting Software

If your bookkeeping is done by your accountant, this will already be covered, but if you do your bookkeeping in-house, use cloud-based accounting products for real-time tracking of sales, expenses, account balances and more. This level of insight facilitates better decision making. Software also makes tasks like sending client invoices and reminders simple and automated.

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#5: Strategic, not aggressive growth

Increasing profitable sales is the most sustainable path to better cash flow, but growth initiatives like adding staff or purchasing assets carry risk if undertaken too aggressively by stretching finances thin. Ensure your business model and margins can support expansion first; build up cash reserves when possible as a cushion for rainy days when revenue fluctuates.

Careful cash flow oversight doesn’t need to be complicated, but it does require commitment. If your business is looking to improve cash flow, our team of accountants are always on hand to provide personalised guidance and advice.