Finance Management: A Guide to Understand and Manage Cash Flow

Understand and Manage Cash Flow
Pinterest Hidden Image

Without money, the existence of your and anyone else’s company is in trouble. You cannot finance your daily business operations without positive cash flow in your small business. Also, you cannot market your company. So, cash flow has the same value in your business as blood in your body.

As a small business owner, you must monitor your cash flow to discover where your business’s money is spent, what you need to improve, and how to make your company more cash-stable.

Follow this article and strategies that will help you improve cash flow and achieve long-term financial success.

đź“– Key takeaways

  • Healthy cash flow is key to a strong business and a company’s financial health. Positive cash flow comes about through planning and being prepared. Businesses often load themselves up with too many overheads, and sales revenue lags, causing them to struggle to pay bills.
  • Improving your cash flow means attacking this issue from both ends. This means shortening the time you are paid for sales and delaying outgoings by as much as possible.
  • To do this, you need to constantly check on your cash flow statement aside from balance sheets and income statements. Cash flow statements are documents that summarize how much cash or cash equivalents enter and leave a company or business.

Introduction to Cash Flow

What is a Cash Flow?

Cash flow is simply a term for moving money within your company. This movement occurs in two directions: money goes out, and (hopefully!) money comes in.

Cash received usually comes as payments from clients or customers for your products or services. Sometimes, as in a physical shop, you might get your payments at the time of sale. Often, B2B operations end up with accounts receivable, money owed by clients that they will receive on a specific date.

Cash going outcomes from all expenses, such as rent or mortgage payments, website costs, wages, taxes, product orders, and other overheads.

So, cash flow is the total amount of money that enters and leaves your business, and you can calculate it:

net cash

It’s important to understand that cash flow is different from profit. You could profit on paper for a specific quarter or fiscal year but still have periods of negative or poor cash flow when more money goes out than in.

Positive VS Negative Cash Flow

A positive cash flow is when the amount coming to your company exceeds the amount going out. If you succeed in doing so, your company will never collapse.

However, doing so is not easy, and you can estimate this from the fact that approximately 82% of small businesses fail due to a lack of funds, and negative cash flow is one of the main reasons.

Your overall goal should be to maintain a positive state, but what does that mean, and how can you achieve it?

Cash Flow Statements

A cash flow statement is a financial statement that provides aggregate data regarding all company cash inflows and outflows.

It includes all cash inflows from operations, external investment sources, financing, and all cash outflows that you pay for operations and investments.

The cash flow statement is believed to be the most intuitive financial statement because it tracks the cash made by the business in three main ways: operations, investment, and financing.

The sum of these three segments is called net cash flow.

Inflow Components

Operating cash flow

The first part of the cash flow statement’s inflow section is operating cash flow, which covers cash flows from operating activities (CFO). It is the company’s net income that includes transactions from all operational business activities, such as sales and receivables collections. However, this net income is not the same as in the income statement because the cash flow statement is recorded when it actually occurs or when it is in the checking and savings account.

This section is important because it reflects the company’s ability to generate high cash flow from its primary operations.


This section looks at cash flows from investing (CFI), which result from investment gains and losses from investments in long-term assets and securities like rental properties, real estate, factories, equipment, or stocks, such as selling assets or any returns on those investments.

Financing activities

Cash flows from financing (CFF) is the last section of the inflow section of the statement. This section includes cash flows related to business financing, such as external financing sources such as loans or stock issues.

Example of Cash Flow Statement

Let’s look at one example of a cash flow statement for one company:

  • Starting Cash Balance. The company started the month with $23,000 in cash.
  • Cash Inflow. The company received $44,000 through cash payments. If the company gives a credit or delayed payment, this amount will not be included as cash inflow until the payment is received. The inflow section will also show any income from investments or financing.
  • Total Available Cash. The starting balance and the inflow for the month show the company’s total available cash, $23,000 + $44,000 = $67,000).
  • Cash Outflow. This section must cover the company’s spending on inventory purchases ($45,000) and operating expenses ($20,000), which totaled $65,000 for this month.
  • Net Cash. This is the last section, showing the net change in flow. The company’s management can see from this section whether they had a negative or positive cash flow for that month ($67,000 – $65,000 = $2000).
cash flow statement example

But let’s say that half of the company’s income ($22,000) is on a credit that will be paid after 30 days. As you can see, in this case, the company will have a minus of $20,000 and need to find other sources to pay the bills.

negative example

Burn Rate

Every business owner needs to know how long they can continue to lose money.

If you want to find the response to this question, you must calculate your burn rate, which is the speed at which your company, without positive cash flow, spends money to cover its basic costs. The burn rate is shown as the amount of cash spent each month. For example, a $30,000 burn rate means that your own business spends $30,000 each month on rent and other operating expenses.

burn rate

As you can see, you can use the burn rate to calculate how long your company can survive without revenue. If your business has $100,000 in cash and its burn rate is $30,000 a month, you can stay “in business” for ten months without making any sales.

$100,000 Ă· $30,000 = 3.33 months

Why Does This Matter to You?

All successful businesses rely heavily on steady cash flow. The money they bring can then be used to expand and build the business and cover everyday costs, like paying rent on the business building and buying new stock.

However, businesses sometimes may struggle with cash flow. If this is happening to your business, you must find a way to fix it quickly! Otherwise, your business is likely to suffer some major consequences.

Negative Impact

  1. Going Under. To maintain a successful business, you must pay your suppliers and then your employees. On top of that, you likely owe money to your original creditors and have overheads. When cash flow is negative, and you can’t pay what’s owed, there’s a good chance your business could end up going under entirely.
  2. Drowning in Excess Fees. Sometimes, businesses will take measures to try to stay afloat and avoid going under entirely. Often, this means taking out extra loans or paying bills late. With the latter option, you often drown in late fees and penalties. And, with the first, it’s easy to get in over your head with business loans, plus the cost of interest.
  3. There is no room for Growth. You will also not be able to jump on a great opportunity. Perhaps a new product line would be just what you need to boost sales. But without the money to invest in it, your business loses out. The same applies to hiring new employees, opening new locations, buying new machinery, or getting a better supplier.

Positive Impact

positive cash flow to succeed
  1. You Can Finance the Future Growth of Your Company. Your business’s current amount is directly related to its growth. Without money, you can’t expand into other markets, expand the assortment of products and services, increase the number of employees, etc.
  2. You Can Test Different Ideas. Entrepreneurial characteristics include having more ideas to ensure the company is on the right path. However, each idea requires human resources and additional material and financial resources to be implemented.
  3. You Can Finance Experimentation and Possible Mistakes.You cannot expect to always win or succeed in everything they start doing. Running a small business means experimenting and testing different things to find the best solution. In such a way, some ideas will succeed, but someone will fail. With enough cash, your company can finance such mistakes.
  4. You can invest in new product development. This is crucial for a company’s growth, but it also requires additional investments in activities such as research and development, prototyping, testing, etc.

How to Manage Cash Flow?

1. Analyse Your Cash Flow

First, you want to model your current cash flow position by plotting it as a business forecast. 

This can be done via a very simple spreadsheet that records your opening bank balance and then a record of all the money coming in and going out over a certain time period. Consider your fixed costs, like rent, and your marginal costs, like how you need to use a certain amount of product per job. Then, you can look at customer data to see when sales are made and average payment times for each sale.

Such forecasts must also accurately capture the lag between incomings and outgoings. If you are getting squeezed from two ends, with customers not paying and suppliers demanding payment, you can be put in a challenging financial position.

2. Determine Cash Flow Problems

The second step is to identify all possible reasons for problems. Here is what you can look to find the reasons:

  • Negative cash flow. First, you must be sure that you have a problem looking at the cash flow statement and net cash section, and if it is negative, you really have a problem.
  • Poor cash flow management. Many businesses do not know how to handle this properly. They might overestimate future sales, underestimate expenses, or not understand their financial situation well.
  • Slow receivables collection. Late payments can hurt your cash flow.
  • Lack of financing. If you are facing problems, one solution is to seek external financing. This can come in the form of loans, lines of credit, or investor investments.
  • Unforeseen payments. Sometimes, unexpected payments can arise, and because of that, it is important to have a contingency plan in place for such situations.
  • Inadequate emergency funds. Businesses must set aside emergency funds in case of unexpected events that could negatively impact their cash flow.
  • Overstocking inventory. Excess stock can tie up a significant amount of cash.
  • Seasonal fluctuations. Some businesses experience seasonal fluctuations, with sales being high during certain times of the year but low during others.
  • Improper budgeting and forecasting. Without an accurate budget and forecast, businesses may struggle with managing their finances.

3. Strategies for Improving Cash Flow

Optimize operations

Think about how you can optimize operations to reduce costs and increase the efficiency and effectiveness of all your business processes. If you want to achieve a high cash flow level, you must continuously work on improvements in your business.

Accelerate the collection of accounts receivables.

Your payment terms should be focused on ensuring adequate revenue is coming into the business to cover expenses effectively.

Closing a sale is not enough. You should further ensure your customers make payments on time. Even when your company is exceptionally profitable on paper, if customers take too long to make payments, the business will experience a cash flow shortage. The following are ways to get clients to make payments in a timely fashion:

  • Offer a discount for immediate payment. Offer a small discount to show appreciation to customers who pay sooner or a reasonable interest charge to those who go over the payment terms.
  • Send invoices quickly.Sending invoices immediately is one of the most effective ways to ensure receivables arrive quickly. Instead of waiting until the month ends, invoice clients when you close a sale. If you struggle with your business’s invoicing process, consider investing in cloud-based accounting software, including QuickBooks, Sage, FreshBooks, and Xero.
  • Charge late payment penalty. Be sure to create a solid invoicing policy. This involves setting a date when all invoices should be cleared and sticking to it. You should then impose a late penalty for payments exceeding the set deadline. Ensure your customers know about the late payment penalty, how much they will likely be charged, and when they will be penalized.
  • Send reminders.Keep reminding your clients when an invoice is due. You could email or text a few days before the due date on the day they should make the payment.
  • Factoring. Finally, if you have a large number of outstanding invoices, you can consider factoring, a specific type of finance in which you sell your business accounts receivable (invoices) to a third party to meet your cash needs.

Monitor inventory levels.

Inventory management is also a solution to keeping your cash flow healthy. With excess inventory, you are inefficient and making your cash sit around on things that are not moving. To keep your cash flows healthy, you must adequately forecast your sales to estimate how much stock you need to purchase and keep.

Negotiate favorable terms with suppliers.

Another secret to healthy cash flow is good working relationships with suppliers. Once you have their trust, you can set up trade credit with them. Extended credit terms give you time to sell your products and have cash before your payment is due.

Evaluate costs and reduce or adjust as needed.

Overheads are business expenses that don’t contribute directly to manufacturing the product or rendering services. Instead, these are expenses that your business incurs to keep the business going. These include rent, utilities, insurance, and payroll.

Increase asset utilization

Unused or underutilized assets drain your cash flow. Review your inventory and equipment and determine if you can sell, rent, or lease them to generate additional income.

Also, check the software you are paying for monthly, such as accounting, customer relationship management, office apps, etc. You can cancel your subscription if you don’t use some of it.

Manage debt efficiently

Too much debt can impact your cash flow and put your business at risk. Evaluate your current loans and credit cards and see if you can negotiate for lower interest rates or consolidate them into one manageable payment.

Revise pricing strategy

You need to clearly understand your margins and costs to keep your cash flows healthy.

With this, one way to keep your margins safe is to modify your pricing strategy by keeping margins fixed no matter the cost. This means increasing your price until it meets the margins you set out. A price increase will be understandable for your products since raw materials and world markets have also increased.

Ensure assets are diversified.

To maximize your business’s efficiency and minimize risk, it’s crucial to ensure that your assets are diversified. This means making investment decisions and investing in various assets, such as stocks, bonds, real estate, and cash equivalents. Diversifying your assets can spread the risk and potentially achieve higher returns.

Secure financing through credit lines.

One rule of business is that not all debt is bad debt. Getting business financing for working capital can be a very good way to keep your cash flow healthy. You can approach a bank to get a credit line to keep your cash flows steady.

Raise Equity

Having problems with your cash flows doesn’t necessarily mean that your business has no potential anymore. Your business can still look very lucrative to potential investors. If you are in this situation, raising equity is an option for you to keep your cash flows positive and healthy.

To not compromise your cash levels, you can choose to raise equity using a new partner or an initial public offering in the stock market. Taking this step will attract investors and allow you to raise the capital you need to expand your business while keeping your cash flows healthy.

Perform customer credit checks.

The pressure to make a sale or win a client could cause you to sell on credit instead of cash. However, before allowing credit sales, conduct a credit check. If a client has bad credit, they may not make timely payments, hurting your cash flow. If you decide to sell on credit regardless of the client’s bad credit history, charge high interest to protect yourself.

Lease instead of buying equipment to improve your cash flow

Most business owners prefer purchasing equipment, real estate, and supplies because it results in significant cost savings in the long run. If your company is short of cash, buying new equipment is not the best way to save money.

By leasing or renting, money leaves the company in small increments, meaning you can still finance daily operations and keep your cash flow positive.

Build a cash reserve.

Establish a schedule for depositing money into an emergency fund. Saving extra funds can help keep your business from experiencing cash flow problems when faced with unexpected spending needs. It provides you with the money you need to scale your business. A cash reserve can also prevent you from taking out high-interest loans from banks and other lenders in case of a sudden expenditure.