Cash flow management is a critical aspect of running a successful small business. Regardless of how profitable your business may seem on paper, without proper control over your cash flow, you may find yourself struggling to pay bills, meet payroll, or invest in growth opportunities. In this post, we'll explore the ins and outs of managing your cash flow effectively to ensure the financial health and longevity of your small business.

But first, is cash flow really all that important?

Well, according to one U.S. Bank study, 82% of failed businesses cited cash flow problems as a factor in their failure. Remember that cash flow doesn’t just mean the amounts of money that are coming in and out: you have to take timing into account, too. If you operate a business based on an invoicing system, for example, and your invoices aren’t paid until after your loan payments are due, you might end up with a cash flow problem.

So what do we mean by managing cash flow?

Operating cash flow refers to the movement of money into and out of your business. This is the cash generated or used by your day-to-day business operations. It includes revenue from sales, expenses like salaries and rent, and changes in working capital (accounts receivable and accounts payable).

Critical to monitoring cash flow is opening a business bank account. This makes all your accounting and cash forecasting much easier. In one quick glance, you can see your bank balance and all your expenses and income for any past month. To open a business bank account, all you will need is your federal EIN number and your opening bank balance.

Create a cash flow forecast to manage operating cash flow

Start by forecasting the cash coming into, and going out of, your business for each of the upcoming months, or even a year. This helps you anticipate periods of cash surplus and shortfall, allowing you to plan accordingly.

To create a cash flow forecast, start with your current bank balance. Then estimate two things:

1. The expenses you will have each month, based on previous months, and the fixed expenses you have each month, such as:
1. Fixed expenses would include equipment loan payments, rent, website subscriptions and such.
2. Variable expenses includes materials and supplies, gas for your vehicle, taxes due, etc
2. The income you will have each month, based on expected sales, maybe subscription income, maybe commission deposits you are expecting, craft show income, payment for purchases, and any account balances due to you.

Then, simply take your starting bank balance, deduct your projected expenses for the month, and add the projected cash income for the month. That will give you a projected ending bank balance for the month.

That ending balance then becomes the starting balance for the following month. And the process continues each month. If you are capable with spreadsheets, this should be a fairly simple spreadsheet, and can be extended out over 12 months or more. 

To save time and effort, you can receive my free CASH FLOW FORECAST TOOL to download. It’s a spreadsheet loaded with all the formulas you’ll need, and ready for you to just fill in your projections!

You should immediately see the months you will have surplus cash or a cash shortfall. That gives you the ability to react early, instead of a last minute panic.

Will you have a cash shortfall the month before craft show season starts, as you build your inventory? Then a surplus when the sales come in? Maybe you should consider putting some of those early material purchases on a credit card for 30 days. Or build up your cash reserves going into the season to cover those large early inventory investments.

If you know it’s coming, and have a plan, how much less stress will you feel, at a time when you should be optimistic about a big selling season?

How to avoid ending up with inadequate operating cash

Start by managing your receivables, Promptly invoicing customers and following up on overdue payments is essential. When you wait until the end of the month to invoice everyone, and then it’s another 30 days to get paid, it’s not helping your cash flow.

Also optimize the payables if you can. Negotiate favorable terms with suppliers, but be cautious not to jeopardize relationships by delaying payments excessively. Timing your payables can help maximize available cash. For example, can you get 30 day terms with a supplier in November, so you are paying for materials when your December sales come through?

Next, maintain adequate reserves. Set aside a portion of your profits as a cash reserve for emergencies or unexpected expenses. This safety net can prevent you from tapping into essential operating funds. You should also set aside a reserve for paying taxes, and possibly any annual insurance payments you may have each year. Many businesses will even establish a separate bank account for each of these cash reserves, so the balances are easy to identify. 

Reduce any unnecessary expenses. You should periodically review your expenses and identify areas where you can cut costs without compromising the quality of your products or services. The real trap for me is subscriptions. In fact, last week we paid for a Norton antivirus subscription for a laptop that was destroyed 6 months ago. Had we not been checking every purchase on the business credit card, it would have been $500 down the drain. But I contacted Norton immediately and they refunded the payment, as I’m sure I’m not the first to do that.

Monitor your inventory, keep an eye on your inventory turnover rate, and avoid overstocking. Excess inventory ties up cash that could be used elsewhere. Excess inventory not only ties up cash, but often valuable storage space, requires valuable time to reorganize, and can just lead to less than optimal mental health while working in a cramped, disorganized environment.

Regularly update your budget as you get new information and data. A well-structured budget can serve as a roadmap for your financial decisions. Review and adjust it as needed to reflect changing circumstances.

Use technology to automate and streamline processes. Invest in accounting software or financial management tools to streamline your financial processes, reducing the risk of errors and saving time. For example Quickbooks online pulls your expenses from your bank account, using the rules you set up to categorize them. Then you just have to double check for accuracy.

Finally, seek professional advice if you're struggling with cash flow management. Consider consulting with a financial advisor or accountant. Their expertise can provide valuable insights and strategies tailored to your specific situation.

Conclusion

Effective cash flow management is paramount for any small business. By understanding the components of cash flow, you can maintain a healthy financial position, seize growth opportunities, and weather economic turbulence with confidence. Remember that cash flow management is an ongoing process that requires vigilance and adaptability, so stay proactive and continue to refine your approach as your business evolves.

ABOUT THE AUTHORS

Scott Chervitz is owner of George Supply Company, dedicated to helping woodshops build their brand. See more at GeorgeSupplyCo.com. You can reach him at Scott@GeorgeSupplyCo.com, on Instagram at @GeorgeSupplyCompany or Twitter @ScottChervitz

Brian Chervitz, M.S., is an instructional designer and teacher in St. Louis, MO.