Cash Flow Management for Small Businesses

Starting a business in the United States can bring a lot of challenges, and managing cash flow is one of the biggest. Even successful ventures may face difficulties if cash flow isn’t properly maintained. Developing sound financial practices is critical for long-term success. At Remitly, we understand the importance of strong financial foundations for entrepreneurs. While we focus on money transfers, we also share educational resources that support business owners. This guide offers insights into managing cash flow as your business expands.

Managing cash flow in a growing business

Cash flow refers to the movement of money into and out of your business. It’s a strong indicator of financial health and impacts your ability to meet short-term obligations and invest in future growth. Maintaining a balance between income and expenses ensures funds are available for ongoing operations.

Importance of cash flow management

Positive cash flow enables you to:

• Pay suppliers and employees on time, supporting business continuity and trust.

• Invest in new opportunities, such as equipment or new markets.

• Prepare for challenges, like unexpected expenses or seasonal downturns.

Without it, businesses may encounter financial strain. In fact, 82% of small businesses cite cash flow issues as a primary reason for failure.

Challenges faced by growing businesses

Growth brings complexity. Some common obstacles include:

• Increased operating costs, like staff or inventory.

• Longer customer payment cycles, especially from larger clients.

• Inventory management issues, which can tie up capital.

• Seasonal fluctuations, making revenue less predictable.

Key strategies for effective cash flow management

Payment terms negotiation with suppliers

Consider these strategies:

1. Offer discounts for early customer payments.

2. Request extended payment terms from suppliers (e.g., Net 60).

3. Build relationships to foster flexibility in terms.

Streamlining invoices and receivables

Establish clear payment terms and automate invoicing using digital tools. For example, our digital safety checklist includes tips for secure online payments.

Use of cash flow forecasting

Historical data can help you anticipate seasonal changes and adjust business strategies accordingly.

Practical tips for improving cash flow

Optimize inventory management

To reduce excess stock and improve cash flow:

• Discount unsold inventory

• Use just-in-time systems

• Analyze trends and manage inventory levels

• Utilize inventory management tools

Control expenses effectively

Track and evaluate expenses regularly. Renegotiate contracts, adopt energy-efficient solutions, and outsource non-core functions when feasible.

Diversify revenue streams

Explore new audiences, offerings, or passive income, like renting unused space.

Recognizing and resolving cash flow problems

Common issues include:

• Unrealistic startup costs, as noted in this guide

• Customer payment delays

• High overhead

• Limited reserves

• Rapid expansion

• Costly borrowing, like business loans

• Inventory mismanagement

To address shortfalls:

• Cut non-essential costs

• Accelerate receivables collection

• Generate revenue via promotions or upsells

• Consider short-term financing options

Maintaining 3–6 months’ operating expenses in reserve is recommended. But overcapitalization can reduce efficiency.

Long-term planning for financial sustainability

Understanding these reports can help:

• Cash flow statement (shows historical cash movements)

• Forecasts (project future inflows/outflows)

Benefits of strong cash flow include:

• Greater resilience

• Improved financing opportunities

• Capacity for growth investments

Tools and resources for business owners

Accounting tools

These platforms can help streamline finances:

Educational resources

Explore:

• SCORE
• Small Business Administration
• Money Smart for Small Business

FAQs

What are the four components of cash flow management?

The four components of cash flow management are:

1. Cash inflows: All sources of income for your business, including sales revenue, loans, and investments.
2. Cash outflows: All payments your business makes, including operating expenses, supplier payments, payroll, taxes, and utilities.
3. Net cash flow: The difference between cash inflows and outflows during a set period.
4. Cash flow forecast: An estimate of future cash inflows and outflows over a specific period.

How do you calculate cash flow for a small business?

Subtract your expenses from your revenue over a specific period: Net Cash Flow = Cash Inflows – Cash Outflows.

How much cash flow is good for a small business?

This will depend on the type and size of your business, but you should aim for positive cash flow. Ensure your business consistently generates more cash than it spends, so you have enough funds available to cover operating expenses, pay all bills on time, and reinvest in opportunities to allow your business to grow.