Guide
Cash flow management for small business: a practical guide
The problem
Profit isn’t cash
It usually goes wrong like this. The income statement says the month was good. The bank says there isn’t enough for Friday’s payroll. Both are right.
You count a sale when you send the invoice. You can spend it when the customer pays, which might be 45 days later. Your people, your landlord and the IRS are paid on time in between. The better business gets, the wider that gap grows, because more work means more cost up front and more money sitting in unpaid invoices.
Managing cash flow means closing that gap, and it starts with seeing it coming.
First, see it
Get the warning first
Every tactic below works better with warning. A customer asked for early payment six weeks before you need it will often say yes. The same request made on Thursday for Friday sounds like distress, and is.
The tool for that warning is a 13-week cash flow forecast: your bank balance, week by week, for the next quarter. You can build one in a spreadsheet with our free cash flow forecast template, or have cash flow forecasting software build and update it from your bank data.
Either way, managing cash becomes a weekly look at one question: is there a week ahead where we go below our line, and what would fix it?
Ten ways to improve cash flow
Practical ways to improve cash flow, without selling more
Bring money in sooner
- 1
Invoice the day the work is done
Every day between finishing the work and sending the invoice is a day added to how long you wait. Invoicing weekly or on completion, and never at month end, is the cheapest change on this list.
- 2
Shorten your terms, and say them plainly
Net 30 is a habit rather than a law. Net 15, or due on receipt for small jobs, is normal in many trades. Put the due date on the invoice as a date rather than a number of days.
- 3
Take a deposit on large jobs
If a job needs materials or weeks of labor before it can be billed, a deposit or progress payments mean your customer funds the work instead of your overdraft.
- 4
Make it easy to pay you
Card and bank-transfer links on the invoice are paid faster than a check in the mail. The fee is usually smaller than the cost of waiting three more weeks.
- 5
Chase overdue invoices on a schedule
A polite reminder the day after the due date, a call at a week, a firmer note at two. Most late payment is disorganization rather than refusal, and the vendor who asks is paid first.
Time what goes out
- 6
Pay on the due date, not before
Paying a bill two weeks early is an interest-free loan to your vendor. Schedule payments for the day they’re due, unless there’s a discount for paying early that’s worth more than the cash.
- 7
Ask vendors for better terms
A vendor you’ve paid reliably for a year will often move from net 15 to net 30 if asked. Do it while things are going well. It’s a much harder conversation once you’re late.
- 8
Move big payments away from payroll
You often can’t change the amount of a payment, and you can often change its date. If rent, a loan payment and payroll land in the same week, ask to move one. Many lenders and landlords will shift a due date.
Plan for what you can see coming
- 9
Set tax money aside as you earn it
Sales tax and payroll tax were never your money. Estimated income tax is a bill you can see coming a quarter away. Move it to a separate account when the revenue arrives, and the quarterly payment stops being a shock.
- 10
Keep a cushion, and arrange credit before you need it
Decide the balance you won’t go under. One payroll plus two weeks of your other regular bills is a common line. And apply for a line of credit while your numbers look good. It’s far easier to get, and cheaper, than when you’re already short.
This guide is general information. It is not financial, tax or legal advice. Talk to your accountant before changing how you collect, pay or borrow. See our Disclaimer.
Where Flocuity fits
The weekly look, done for you
Flocuity builds the forecast from your bank history and your open invoices and bills in QuickBooks Online or Xero, keeps it current, and tells you which week, if any, you’d dip below your cushion, and why.
It puts payroll and taxes on their real dates, shows how much to set aside, moves past-due invoices to a later date, and on Plus, lets you try a fix (a bill moved, a hire delayed, slower collections) before you commit to it.
Questions about managing cash flow
- What is cash flow management?
- Making sure the money is in the bank on the day it has to go out. It has three parts: knowing what’s coming in and going out and when (a cash flow forecast), speeding up what comes in, and timing what goes out.
- Why do profitable businesses run out of cash?
- Because profit is counted when you invoice and cash when the customer pays, which may be two months later. Growth widens the gap, because more work means more costs up front and more money tied up in unpaid invoices.
- What is the fastest way to improve cash flow?
- Collect what you’re already owed. Overdue invoices are money you’ve already earned. After that, invoice sooner, shorten your terms, and move one large payment away from payroll week. None of these needs more sales.
- How much cash should a small business keep on hand?
- There’s no single answer, and this isn’t financial advice. A common starting point is one payroll plus two weeks of your other regular bills, more if your income is seasonal or comes from a few large customers. A forecast tells you whether the line you chose is ever crossed.
- What is the difference between cash flow and profit?
- Profit is what you earned, less what it cost, in a period. Cash flow is what actually moved through the bank in that period. Loan principal, tax payments, equipment, owner draws and unpaid invoices all change cash without changing profit in the same way.
- How often should I look at my cash flow?
- Weekly, for most small businesses. It takes a few minutes if the forecast keeps itself up to date, and it’s often enough to catch a problem six weeks out instead of six days out.
- Should I use my accountant for this?
- Yes, for setting it up and for the decisions that follow. Your accountant knows your tax position and your lender. What an accountant can’t do is look at your bank every morning, which is what a forecasting tool is for. Flocuity lets you invite them in at no extra cost on its Standard and Plus plans.
Try it with your own numbers
Answer a few questions, add your bank history, and see the next 13 weeks in about ten minutes. You don’t enter a card until you’ve seen your forecast.