How to manage cash flow in 10 steps (2024)

Cash flow is the lifeblood of your small business.

A healthy flow of cash in and out of your business means you can pay employees, suppliers, rent, rates, taxes, and other operating costs on time.

Getting this balance right isn’t always easy. According to a recent survey, cash flow is a problem for nearly 3 out of 5 small business owners.

Having cash in hand also lets you put money back into your business. Sometimes you need to spend money to make money—on things like tools and technology, marketing, branding, and staff.

In this article, we highlight how you can better manage your cash-flow finances.

Here’s what we cover:

  • What is cash flow management
  • How to manage your cash flow effectively in 5 steps
  • How to improve your cash flow in 5 steps
  • Final thoughts: Schedule time for your finances

What is cash flow management?

Your challenge is to manage the money coming in (accounts receivable) with the money going out (accounts payable).

Ideally, you should be aiming for a consistent positive cash situation—in other words, more money coming into the business than is being paid out.

So how can you make sure you’re managing your finances properly?

If you haven’t already, you should set up for better cash-flow management. Basic bookkeeping can be monotonous, but you need to do it to keep track of money going in and out.

Keep a record of all payments, bank statements, and bills from all customer sales.

You’ll also need to keep records of money going out—such as vendor and supplier purchases, and payroll.

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How to manage cash flow in 10 steps (1)

Why is managing cash flow necessary for small businesses?

When uncertainty hits, bigger businesses often have cash reserves to ride out the bad times.

During coronavirus, for example, companies with business models that work when people stay at home (such as Amazon) thrived.

Smaller businesses are less likely to be sitting on a pile of cash and will lack the resources and backup plan to ride out challenging times in the same way.

That’s why you need to keep an extra-close eye on your cash flow.

What is the difference between revenue and profit?

When reviewing your cash flow, it’s crucial not to confuse your profits with revenue.

Let’s look at the difference between the 2 of them.

  • Revenue: The amount of money that’s come into your business from direct business activity (such as sales) or investors.
  • Profit: The amount of money left over after you pay all expenses. Calculate profit by taking your revenue and subtracting your expenses from that number. If the amount of revenue coming into your business is the same as what is necessary to pay your expenses, you are not making a profit—you are surviving.

If the revenue is less than what is necessary to pay expenses, you are losing money and risk failure.

Your target is to make a profit, where revenue is greater than the cost of your expenses.

How to manage your cash flow effectively in 5 steps

1.  Create a cash flow forecast

Making regular and accurate cash-flow projections is one of the most important things you can do to notify you of problems before they arise.

You’ll also need to make decisions based on good forecasting and estimates, so establish a cash-flow forecast.

Start by making a list of assumptions on which to base your forecast—it should include a prediction of price increases for your raw materials and a look at what you’ll therefore charge your customers.

There should be a projection of the growth or reduction of your sales, considering issues such as the seasons and the current trading environment.

You’ll also have to factor in outgoings such as salary increases and the growth of other costs.

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How to manage cash flow in 10 steps (2)

2. Calculate revenue

Once you’ve got a reasonable idea of how your sales will go, you’ll need to consider how much revenue this will bring in.

Consider when you’ll get paid for these sales.

You might, for instance, have a regular customer who brings in a lot of business, but you’ll need to factor into your forecast that they usually take 60 days to pay.

3. Identify your expenses

These typically include wages and salaries, suppliers’ costs, rent and rates, directors’ remuneration, and the purchase of new assets.

You might need to add interest payments and insurance premiums. Use last year’s bank statements as a checklist while anticipating new incomings and outgoings for the next 12 months, based on internal and external factors.

You want to have a reasonably accurate view of your opening and closing financial position for a month, 6 months, and 12 months.

4. Review your finances

You never “finish” a cash-flow forecast—for it to be helpful, you should constantly review and update it to reflect what’s happening in your business and correct any assumptions you made when creating the forecast.

It’s also essential to stress test your projections.

If sales suddenly fall by a quarter, for example, will you still be able to pay your essential bills? What will be the impact if you find that you need to repair or buy a new piece of equipment?

5. Manage your reporting

When the pandemic threw so many businesses into confusion, it was easy to let financial reporting slip. And startups are no exception.

Reassuring customers, handling suppliers, and managing staff working from home while keeping others safe is essential, but so is ensuring that your financial reporting is up to date. Otherwise, it won’t be a true reflection of your monetary situation.

Why is financial reporting so essential? With it, you can:

  • Keep an eye on the financial health of your business—something that’s important during times of uncertainty and volatility.
  • Make sure sales and other income, on the one hand, and your costs, on the other, are both correct.
  • Pay regular attention to your profit and loss account (also known as an income statement), so you can check that you’ve made a decent profit over a set period.
  • Keep an eye on your cash-flow statement (inflow and outflow), as this shows your viability in the short term and helps you manage your bills.
  • See who you need to pursue most actively for payment and which of your creditors you’ll need to pay first.
  • Keep a sharp eye on your balance sheet—so your assets and liabilities are accurate, detailed, itemized, and balanced.
  • Get the information you need to apply for loans and investments.
  • Include stock overview, asset register, aged creditor/debtor, and VAT reports.

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How to manage cash flow in 10 steps (3)

How to improve your cash flow in 5 steps

1. Improve your receivables

Looking at your finances, you may notice that specific customers are taking their time in paying you.

This can wreak havoc with your cash flow, especially if you’ve spent money on materials and suppliers (like you might have to in the construction industry, for example).

Look at ways you can improve the way you collect cash.

You could take payments directly from invoices electronically, for example, and ensure your invoices are well-formatted and look professional.

You can incentivize customers to pay their bills by offering discounts if they pay ahead of time. Even if you take a minor hit in terms of profit, it can be better to get the cash in hand early.

Watch out for customers with bad credit.

Credit risk is part of doing business, but you can mitigate this by asking customers to complete an application before giving them credit. Making the sale may not be worth the pain and hassle of late payment.

If necessary, hit them with interest charges outlined in a formal credit policy that clarifies the specific conditions you have granted them credit.

2. Drive sales and experiment with your pricing

How you do this depends on your product or service, and demand.

For example, you could increase your pricing if you believe customers will pay more. It may lead to reduced sales—but you could make more money.

You should research three areas for pricing:

  • Your costs and what you need to make a profit
  • Competitor pricing
  • Pricing in your target market

Equally, you could reduce prices or offer discounts. After doing your research, try to find that pricing sweet spot.

3. Manage your payables

It’s not just a question of handling your money coming in. You need to manage what’s going out. Here’s how you can do that:

  • Cut unnecessary expenses. You don’t want to pay for anything you’re not using, such as software subscription fees.
  • Cut any expenditure that isn’t adding value and carefully look at your business costs.
  • Look for ways to manage your payables more effectively. Moving to the cloud and using electronic payments will make it easier to track when money comes out. You can schedule your payments, so it won’t hit your cash flow too much at a lousy time or take too much money out of your account at once.
  • Keep a friendly line with suppliers and lenders, as it may help you negotiate better payment terms. They may be more flexible than you think, but they aren’t going to help if you don’t ask.

4. Review your finance options

You may hit difficulties. The pandemic forced many businesses to look for loans and grants to keep going and manage vital functions such as payroll.

Make sure you can survive cash shortfalls in the event of a cash crunch. Act quickly and decisively to turn the situation around—follow points 1, 2 and 3 above to do this.

Although your cash flow may look healthy, sometimes you need to take on financing to get extra funds.

Maybe you want to expand your operations or need new equipment. You might need extra inventory to fulfil a massive order.

Taking out a loan can be a good way of getting working capital if you are clear about the reasons for taking one and can pay it back over the full term (or early if you want to save on interest).

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How to manage cash flow in 10 steps (4)

Here is a quick rundown of some of your options:

Bank loans

If you want to go down the traditional route, banks are a good way of getting a loan as you might have an existing relationship.

However, they are possibly slower and more bureaucratic than high-tech providers.


Non-banks are financial institutions that are don’t offer lending and depositing services.

Non-banks generally have fewer requirements than banks. Technology and the internet mean the lenders available to you are more diverse than ever.

Invoice finance and asset-based lending

Invoice finance and asset-based lending is especially useful if customers are slow in paying their bills.

In a nutshell, invoice or accounts-receivable financing enables you to use your unpaid invoices as security for a loan. You pay a percentage of the invoice amount to the lender as a fee for borrowing the money.

Invoice factoring

With invoice factoring, you sell your unpaid invoices rather than wait for the client to pay, usually around 70% to 90% of their total value.

Once the client has paid the factoring company the total amount, the factoring company then pays you.

They’ll charge you a service fee, usually around 1% to 5% of the total invoice.

Business line of credit

Also known as revolving credit, a business line of credit is where you borrow money either in 1 lump sum or several smaller amounts until you reach the agreed credit limit.

Each drawdown becomes a separate loan to be repaid according to a repayment schedule.

As with any loan, you pay interest. In this case, you repay each of the loans with interest.

Unlike an overdraft, you don’t have to go into the red on your bank account to access a line of credit.

5. Stay on top of inventory management

Ensuring you can meet your clients’ needs while also avoiding cash being tied up in stock and paying out for storage is a difficult balance, especially when so much is uncertain in every sector.

Effective inventory management is vital.

As with financial management, regular forecasting is useful. Look at frequent communication with customers and suppliers, regular checks on market trends, and analysis of past sales.

Here’s a basic example.

If you’re running a supermarket, you’ll need to keep an eye on the weather as it’ll help you know when to stock up on barbecue food and accessories—or hot chocolate and comfort foods.

Here are a few points to think about:

  • Cloud-based inventory management software with real-time analytics is helpful, as is any system using data to help generate actionable insights.
  • Technology can help you free up new storage space quickly, improving the opportunities for maximizing any income potential for products you can’t sell in the usual way.
  • Adopt a “first in, first out” approach to minimize the chances of perishable stock going off or other items losing their seasonal relevance.
  • Keep a closer eye on higher value items than those with less capital tied up in them.
  • Anticipate reordering requirements so you can give suppliers some notice.
  • Check your receiving process is fast and efficient. You don’t want newly arrived stock getting damaged, going off, or sent to the wrong place for storage.
  • At the other end of the process, make sure you dispatch orders promptly and carefully and ensure you’re ready to dispose of dead stock.

Final thoughts: Schedule time for your finances

Managing cash flow is vital to any business, but it is the difference between success and failure during times of uncertainty and volatility.

With money to hand, your business can weather storms on the horizon and build a foundation for long-time success.

Make time for your finances. Schedule an hour or 2 each week to work on your financial forecasts.

Follow the points we’ve suggested above, but don’t forget to access professional advice whenever and wherever you feel it’s necessary.

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Concepts Related to Cash Flow Management

Cash Flow Management: Cash flow management involves managing the money coming into a business (accounts receivable) with the money going out (accounts payable). It aims for a consistent positive cash situation, where more money is coming into the business than is being paid out. It involves basic bookkeeping, keeping records of all payments, bank statements, and bills from customer sales, and records of money going out such as vendor and supplier purchases, and payroll [[1]].

Revenue vs. Profit: Revenue refers to the amount of money that comes into a business from direct business activity (such as sales) or investors, while profit is the amount of money left over after paying all expenses. It's crucial not to confuse profits with revenue when reviewing cash flow. The target is to make a profit, where revenue is greater than the cost of expenses [[1]].

Cash Flow Forecast: Creating regular and accurate cash-flow projections is essential for notifying potential problems before they arise. It involves making decisions based on good forecasting and estimates, creating a list of assumptions, calculating revenue, identifying expenses, reviewing finances, and managing reporting [[1]].

Improving Cash Flow: Strategies for improving cash flow include improving receivables, driving sales and experimenting with pricing, managing payables, reviewing finance options, and staying on top of inventory management [[1]].

Financial Reporting: Financial reporting is essential for keeping an eye on the financial health of a business, ensuring that sales and other income, as well as costs, are correct, paying regular attention to the profit and loss account, monitoring the cash-flow statement, and managing the balance sheet. It also provides the necessary information to apply for loans and investments [[1]].

These concepts are crucial for small businesses to effectively manage their cash flow and ensure financial stability.

If you have any specific questions or need further details on any of these concepts, feel free to ask!

How to manage cash flow in 10 steps (2024)


How do you manage cash flow? ›

Here are some best practices in managing cash flow:
  1. Monitor your cash flow closely. ...
  2. Make projections frequently. ...
  3. Identify issues early. ...
  4. Understand basic accounting. ...
  5. Have an emergency backup plan. ...
  6. Grow carefully. ...
  7. Invoice quickly. ...
  8. Use technology wisely and effectively.

What does the cash flow statement in 10 to do? ›

A cash flow statement tells you how much cash is entering and leaving your business in a given period. Along with balance sheets and income statements, it's one of the three most important financial statements for managing your small business accounting and making sure you have enough cash to keep operating.

What are the steps of cash management? ›

How Does Cash Management Work? Step 1: Forecast inflows and outflows of funds and prepare a budget accordingly. Step 2: Incorporate different cash management strategies like offering discounts to the debtors. Step 3: Negotiate with the suppliers to enter into the best payment terms with them.

How to manage cash flow problems? ›

How to solve common cash flow problems
  1. Revisit your business plan. ...
  2. Create better business visibility. ...
  3. Get better at forecasting. ...
  4. Manage your profit expectations. ...
  5. Minimise expenses. ...
  6. Get good accounting software. ...
  7. Try not to overextend. ...
  8. Try to get paid quicker.
Dec 23, 2022

What is the key to managing cash flow within a project? ›

Estimate All Project Costs and Cash Outflows

You need to be able to forecast what these project costs and cash outflows will be in advance to better calculate and manage your project cash flow. The first step to do so is to estimate what resources will be required for the execution of the project.

What is the formula for cash flow? ›

Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure.

What are the key points of the cash flow statement? ›

The three main components of a cash flow statement are cash flow from operations, cash flow from investing, and cash flow from financing.

How do you explain cash flow statement? ›

A cash flow statement is a financial statement that shows how cash entered and exited a company during an accounting period. Cash coming in and out of a business is referred to as cash flows, and accountants use these statements to record, track, and report these transactions.

What are the 5 principles of cash flow? ›

The five principles that form the foundations of finance cash flow are what matters, money has a time value, risk requires a reward, market prices are generally right, and conflicts of interest cause agency problems are discussed in the media.

What are the three key cash management strategies? ›

Key takeaways

By performing cash flow forecasting and analysis, optimising payables and receivables, and undertaking cost control, firms can ensure that they maintain strong cash levels, enabling the pursuit of growth opportunities.

What are the five techniques in cash management? ›

5 Methods to Achieve Better Cash Management
  • Create a cash flow statement and analyze it monthly. ...
  • Create a history of your cash flow. ...
  • Forecast your cash flow needs. ...
  • Implement ideas to improve cash flow. ...
  • Manage your growth.

What is the purpose of the statement of cash flows quizlet? ›

The statement of cash flows provides information about a company's operating, financing, and investing activities. It reports cash receipts, cash payments, and net change in cash from operating, investing, and financing activities.

What is cash flow and why is it important? ›

Cash flow is the inflow and outflow of money from a business. It is necessary for daily operations, taxes, purchasing inventory, and paying employees and operating costs. Positive cash flow indicates that a company's liquid assets are increasing.

Why is a cash flow statement important quizlet? ›

The Cash Flow Statement provides information about a business' ability to remain solvent (meet its obligations) and to grow.


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