How to manage your cash flow as a small business owner

Chloe Bell
By Chloë Bell, Content Journalist

Managing finances as a small business owner can be a struggle, especially when you’re dealing with the stress of cash flow problems. Have a read of this Bionic blog to find out what cash flow is, why it’s important to manage and how to move your business forward in a productive way. 

What is cash flow? 

Cash flow simply means the money that goes in and out of your business. You can either have positive cash flow or negative cash flow.  

Positive cash flow means the money coming into your company is enough to settle bills and grow your business. Negative cash flow means you are not bringing in enough money to stay afloat or develop your company. 

Ideally, you want to have positive cash flow. A negative cash flow means you’ll likely need to find another source of income to deal with outstanding payments and cancel out debts.  

Why is managing cash flow necessary for a small business? 

Managing cash flow is essential as a business owner. Not managing it correctly could land you in debt and make the everyday runnings of your company difficult. You might not be able to pay staff or order stock if you don’t organise cash flow properly - which can ultimately have a big impact on your business. 

A business owner looks through his invoices while working out his businesses energy bills

Is there a difference between cash flow and revenue? 

Yes, there is a difference between cash flow and business revenue. Revenue is any money your business makes from selling products or services.  

Cash flow, however, is the movement of money in and out of your company’s bank account. 

Revenue will likely tell you how successful you are at selling your products, but cash flow shows you how much money you have to keep your business running both now and in the future. 

Basically, even if your business is popular and selling lots of products, you could still face money problems and potential bankruptcy if you have cash flow issues. 

Why is cash flow important? 

Because cash flow is the movement of money entering and leaving your business, proper management enables you to balance the books. It allows you to see how much money you actually have to keep the business afloat. It also lets you gain insight into where you can develop your business, invest and grow in the future.  

What are some of the early signs of cash flow issues? 

There are some early signs of poor cash flow management. If you recognise these in your business, there are steps you can take to create a better cash flow plan and get back on track.  

Too much inventory with downward sales 

Too much stock is a common issue for businesses with cash flow issues. If you suddenly receive high demand for a product — for example, a specific Christmas product which gains interest in November and December — you might think it’s worthwhile to order even more of the same item. But if that demand suddenly decreases, you could be left with stock that you cannot sell and debt from buying too much of the same product. 

Relying on big customers 

Another warning sign of a cash flow problem is relying on big clients to pay in order to keep your business functioning.  

If you depend on one customer to provide you with the money to keep going every month, then what will happen if they suddenly don’t or can't pay? They might have cash flow issues of their own.  

Of course, it’s important you get paid by your customers, but try to avoid relying on their payments to keep your business going. Your business should be able to keep paying bills, rent and your staff whether your customers pay on time or not. 

Short-term debt 

Small business loans can be a saving grace for SME owners. Loans can allow them to access funds and grow their business without saving for years on end. But a danger of short-term debt is not having a large enough credit line to get you out of a cash flow crisis. Always make sure you have or will have enough money to get out of debt, don’t let it spiral. 

How can I manage my cash flow effectively? 

There are a few ways to manage your cash flow to avoid getting into hot water. Take note of these tips and you will be able to create a plan for cash flow success.  

Create a cash flow forecast 

Mapping your cash flow and charting progress is a great way to keep on top of finances. These maps will make you aware of problems before they arise. 

You’ll also need to make business decisions based on forecasting and company estimates, so a cash flow forecast is essential. 

Making a list of business assumptions and predicting the growth or reduction of your sales is important too. Make sure you’re considering factors like the current trading situation and the time of year. For example, your business will have spates of good and bad seasons. So, if you own a florist, Valentine’s Day, Mother’s Day and Christmas will probably be your high seasons. 

Calculate revenue 

Once you’ve got an idea of how your sales will potentially change in the future, you’ll need to consider how much revenue you are bringing into the business. Have a think about when you get paid by big customers or clients, if you have money to fall back on and if there’s anything you can possibly cut back on business-wise. 

Identify your expenses 

Expenses mean things like staff wages, suppliers’ costs, rent and the purchase of new assets or stock. So, make sure you note all these down, too. 

Review your finances 

Run a business audit to help review your financial situation and see how your business is actually performing. Make sure to stress test your cash flow too. A stress test means to test your business finances against the worst-case scenario.  

For example, if sales fall by a quarter one year, will you still be able to pay your bills and store rent? Prepare for bad situations, then you’ll be better equipped should they arise.  

Manage your reporting 

You should also make a special effort to manage and keep up with your cash flow reporting. Keep notes on all the predictions, plans and information mentioned above and regularly update them. It’s vital to make time to do this else you might be left in the dark and not know how your business is performing.  

With financial reporting, you can: 

  • Keep an eye on your business finances 
  • Make sure sales and other income figures are all correct 
  • Pay regular attention to your profit and loss account to safeguard against future issues 
  • Keep an eye on your cash flow statement to manage your bills 
  • See which clients you need to pursue for payments and who pays on time 
  • Keep an eye on your balance sheet—so your assets and liabilities are recorded 
  • Have information ready if you need to apply for business loans  
  • Keep an eye on stock and when you need to be ordering more 

 How can I increase my cash flow? 

There are a few ways you can increase your cash flow and get your business back on track if it’s struggling.  

1. Collect receivables 

Receivables mean the money your business is due to receive from customers or clients. By collecting due receivables, you can stay on top of invoices and decrease the time it takes to get paid. 

An effective way to do this is to encourage customers to pay early or offer incentives for them to pay on time, like future discounts on products or money off for paying in one go. 

Offering a variety of payment options is a good way to go too. Try to make it as easy as possible for a customer to pay. Maybe you could start taking ApplePay or credit card payments to make your process quicker and more accessible? 

2. Tighten credit requirements 

You can try offering your customers a cash discount as an incentive to pay early. This is a tactic that often encourages clients to pay early, which will improve your cash flow situation. 

Be strict, let clients know that early payments will be rewarded but there will be penalties for overdue payments, like extra fees.  

3. Pricing discounts 

Another way for you to increase your cash flow is by decreasing your prices. Changing prices may attract more customers and boost interest in your products.  

For example, if you own a local distillery, and a bottle of flavoured gin sells well but you are still having cash flow issues, you could discount the price of the gin temporarily. If you know you get regular sales from it, you could make more money if you offer it at a lower price or on some sort of deal. 

4. Increase sales 

Increasing your sales is important for most businesses, but how do you do it? You need to: 

  1. Understand your customers and spend time getting to know your audience 
  2. Develop a marketing plan and post regularly on social media 
  3. Encourage customers to leave reviews  
  4. Offer a variety of payment options 
  5. Offer discounts and giveaways 

 5. Securing loans 

Sometimes, a company needs outside help to balance the books, so there are lots of loan options available. Have a look into what kinds of assistance your business is eligible for and what help it would benefit from specifically.  

But be cautious, you should be taking on debt only if it is beneficial for your company and you can manage it. 

How do I know if my cash flow statements are correct? 

It’s always a good idea to double-check your cash flow figures to make sure any statements are correct. To check them, simply compare your cash flow figure with your net increase or net decrease figure. 

If the results are the same, your cash flow figure is correct. If they are different, there may be a miscalculation.  

How can Bionic help with my cash flow issues? 

Balancing cash flow can be tricky when you’re running a business, luckily there are lots of options for you. The team at Bionic are on hand to talk through your options and discuss your business needs. 

If you're struggling with cash flow, we can compare loans that can be taken out to cover these short terms debts, such as working capital loans and invoice finance. To find out more, check out our business loans page or speak directly to the team at Think Business Loans by calling 0203 880 9880.