Cash Management: How to Manage Your Cash Flow

Managing cash flow is one of the most important tasks that face a small business owner. There’s a reason for the adage “cash flow is the lifeblood of a business.” If your cash flow isn’t positive, you can’t stay in business at all. Historically, lack of sufficient cash flow to continue operation is the biggest reason businesses go bust.

Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business. Cash received represents inflows, while money spent represents outflows.

You need cash flow to pay your suppliers, your employees, and the rent or mortgage on your place of business. If you want to expand, you need cash – either cash outright or enough capital to secure a loan or other financing for expansion.

Strong small business cash management ensures that you will not only have enough liquidity to run the business but enough solvency to pay any short-term obligations, such as suppliers or creditors, as well as long-term ones, such as taxes.

The Importance of Cash Flow Management Every Day

Cash flow management for small business is the bridge that guides you to profitability. Don’t ever make the mistake of thinking that busy sales automatically transfer into sufficient cash flow – or profitability. You can have robust sales that are thrilling to experience but still not have sufficient cash flow or profits.

In many ways, it’s the job of your business’s cash flow management system to get your business from sales to sufficient cash flow.

First, your cash flow management system needs to know whether or not your customers are paying. If they are not, you need a reminder system (or a stronger collection system).

Cash flow management is the bridge that guides you to profitability

Second, the cash management system needs to make sure that those payments sufficiently cover your own obligations. Failure to pay your own obligations can hurt and even cripple your business. If you can’t pay for supplies, needed capital expenditures, or real estate, the business may have to close. If you ever have trouble paying your employees, existing workers may quit. Not only that, but you will have a substantial uphill battle attracting top-notch employees.

If you can’t make loan payments, the banks can begin onerous financial measures, including demanding payment, garnishment, and foreclosure. Your credit and community standing can be affected and hurt any prospective business plan.

It’s little wonder that the small business owners surveyed in Small Business Trends: 2021 cited lack of capital/cash flow as their biggest challenge.

The Importance of Cash Flow Management for the Future

Cash flow management is also essential for running your business long term. Keeping track of cash flow lets you develop reports such as balance sheets and profit-and-loss statements. These benchmarks can be used to project your income and expenditures for the future.


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Most business advisors recommend projecting your cash flow, income, and expenditures a year out. Many believe you should also create short-term projections of three to six months out. Projections let you track whether the business is performing to plan. If it isn’t, you can modify the projections and take steps to pinpoint any issues. If necessary, you can take steps to remedy the situation before your cash flow turns negative.

Projections also, of course, let you know if the business is exceeding expectations! If they are, you can augment your profitability and perhaps expand your line of products or your locations.

Finally, once you are profitable, active cash management can ensure that you utilize profitability for the good of your business, for cash reserves in case of downturns, investments, capital purchases, expansion plans, and more.

Top 4 Cash Flow Management Strategy Tips

What are some good cash flow management strategies? Here’s a brief guide.

  1. Institute Strong Billing StrategiesAs you can see from the current and quick ratios, accounts receivable are a major part of cash flow. If your customers aren’t paying, you’ll have trouble maintaining strong cash flow!

    Make sure your billing system is strong from the beginning. Have a system to record customers and purchases first. Never try to keep this in your head, even if you’re a very fledgling business.

    Your choices about cash versus billing, terms, extending credit, and so forth will depend very much upon your business but always have a plan.

    If you invoice, offer customers incentives for paying quickly. You can, for example, offer discounts for immediate payment or some kind of bonus (freebies, gift points) for quick payment. The sooner you collect a payment, the stronger your cash flow.

  2. Institute Strong Collection StrategiesIt’s a fact of life that some customers don’t always pay! Have a plan in place to deal with that eventuality.

    One plan is to institute a system, like requiring cash or credit cards, where your product or service can’t be purchased without immediate payment. This can be applied across the board or to customers who’ve had past issues with late payments.

    Another is to charge interest on late payments. Finally, you can contract with a collection agency. Don’t let unpaid accounts receivable languish!

  3. Manage Your Accounts Payable Cash flow can also be managed via accounts payable. In some businesses, especially if your margin is thin, it can be very beneficial to synchronize your accounts payable with your accounts receivable. Don’t pay your own obligations until you are paid yourself!

    Relatedly, don’t feel you have to pay your own bills (to suppliers, vendors, or the government, as taxes) the minute invoices are received.

    Remember, money works for you over time. If a bill is due on the 30th, you reap no advantage paying it on the 10th. But the money can benefit you by supplying liquidity or gaining interest.

  4. Manage Your PayrollWhen setting up your payment systems, consider your own payroll systems. Synchronize your accounts receivable requirements with the dates your payroll is completed.

The Nuts and Bolts: Helpful Cash Flow Ratios

Folks in the business of tracking your business’s inflow and outgo for a living (like accountants) talk about several different ratios when determining whether you have enough cash flow.

Have a hankering to know whether you are solvent enough to pay obligations generally? The current ratio is the quickest method. Your assets include accounts receivable, inventory, and cash. Your liabilities are bills you owe within (usually) 90 days.

The current ratio is:

Current Assets ÷ Current Liabilities

At times, small business owners may be cash strapped. When that happens, they might consider selling inventory to pay obligations. A measure known as the quick ratio lets you figure out whether you can pay short-term obligations without having to do that.

The quick ratio is arrived at by adding together accounts receivable, cash, marketable securities and then dividing that figure by your current liabilities. Mathematically, it looks like this:

The quick ratio is:

(Cash + Marketable + Securities + Accounts Receivable) ÷ Current Liabilities

Cash Management: The Perils of Going It Alone

It’s crucial for small business owners to realize that they don’t have to go down the cash management strategy path alone.

In fact, it may not even be a good idea to try.

Small business owners wear many hats. You are responsible for seeing that your products or services are produced and made available. You are responsible for customer service and sales. You may have hiring to do. You have to strategize and plan for your business’s success.

While cash management must be done to stay in business, it needn’t necessarily be done by you! Your energy may more profitably be used in other areas of the business.

Cash management can be outsourced to bookkeepers, accountants, and other taxation specialists. They, after all, are far more familiar with cash management practices than most small business owners. They can also help you avoid penalties for lax cash management, such as penalties for failure to pay taxes correctly.

active cash management can ensure that you utilize profitability for the good of your business

Payroll can also be outsourced to specialists and experts who will help you streamline the process, saving you time and effort. With technological investments, you can eliminate the worry of making sure your employees get paid properly and on time.

Guidant Financial Can Help

Guidant Financial offers Guidant Accounting and Tax Services to help busy small owners focus more on their business – and eliminate guesswork. We can help you set up strong cash management strategies from the beginning, avoiding pitfalls.

Call us today at 888-472-4455 or contact us online and let us help you get focused on what’s important: growing your small business.


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