7 tips for managing cash flow

There’s a reason that the phrase “Cash is king” is a motto for so many business owners. Profits without cash can be meaningless, as proved by the number of profitable companies that have filed for bankruptcy. That’s why managing cash flow is so important. Defined most simply as the movement of cash (and liquid cash equivalents) in and out of your business, cash flow essentially boils down to timing. The lag between paying suppliers and employees and collecting from customers is where businesses can get into trouble. While healthy cash flow can create value for a company, poorly managed cash flow can leave business owners scrambling to get more cash on hand. If you’re aiming to drive value and avoid problems, consider these seven business cash flow management strategies.

How to manage cash flow

1. Regularly track your cash flow

The more visibility you have, the easier it is to manage business cash. While you can get a lot of information from analyzing your company’s profit and loss statements, these financial documents may not accurately capture the movement of cash throughout your business operations. That’s why many businesses also generate and review cash flow statements on a regular basis, which allows them to track cash flow by seeing the cash in their business’s operating, investing and financing activities. Positive cash flow occurs when incoming cash is more than outgoing cash, and negative cash flow happens when the cash coming in is less than the cash going out. With this data, you can also calculate the cash flow ratio, a measure of the number of times your company pays off debt with cash generated within the same time period. Getting familiar with these metrics can help you better understand which areas of your business operations are running smoothly and which require corrective action

2. Be strategic about paying your bills

One habit that may drain your business’s cash is paying bills all at once or as soon as you receive them. It may benefit your business cash flow management to be strategic with the outflow of your cash by spreading out your payments. Be sure to read your creditors’ terms so that you have a clear picture of all your debts. Organize your accounts payable by priority, and map out all your business’s payment deadlines. During this process, you might consider whether your payroll cycle is working with your revenue stream. While wage and hour laws will dictate some of this, you may have some wiggle room to free up more cash to keep on hand for the moments when your business could use it the most.

3. Negotiate payment terms with vendors

Low prices are an attractive quality when you’re deciding which companies to do business with, but you may not want that to be the only factor you consider. Choosing vendors with flexible payment terms can help make the difference between whether or not your business has enough cash on hand. If your current or prospective vendor has a payment plan that’s out of sync with your current business cash flow cycle, reach out to a representative for the company to see if there’s any room to negotiate the terms. Once you start the conversation, you and your vendor may even end up finding a solution that is beneficial to both of your businesses.

4. Collect your receivables more quickly

Staying on top of invoicing can be an effective way to shorten the time between when your business records revenue and when the money hits your business bank accounts. Send invoices as soon as the work is completed or once the goods or services have been received. Consider incentivizing your customers to pay faster by offering a discount for early payments. Follow up promptly on overdue payments, and keep a close eye on customers who regularly pay late. If you have chronic offenders, consider changing that customer’s payment terms to require a deposit or impose a cash-on-delivery policy.

5. Take advantage of credit

Sooner or later, you will likely encounter a situation where your business lacks the cash needed to pay the bills. Even the most seasoned business owners deal with unexpected shortfalls. Knowing this may happen, it’s a good idea to have a plan. That’s where a business credit card or a business line of credit can be a valuable resource. Maintaining access to credit is a smart way to build a “cash cushion” into your business plan.

6. Use technology to make and accept payments

Depending on what kind of business you have, online payment processing is one avenue for speeding up the delivery of cash in your business bank accounts and reconciling outstanding balances for cash output. This should be a consideration when evaluating vendors, but also when determining payment options for your customers. There are several payment solutions for credit card processing, many of which have developed plans with small businesses in mind. If you have in-person interactions with customers, consider outfitting your employees with smart phones or tablets that support mobile apps for collecting payments on the spot — wherever transactions take place. Doing so can end up being a huge asset if your business works with deliveries or runs a pop-up shop.

7. Look for ways to move inventory

If your business involves working with products, your inventory is essentially the same as cash. Because you can’t collect on that cash until you sell the inventory, you may want to explore tactics for speeding up the sale of sitting inventory. Increasing marketing efforts, encouraging preorders and altering prices — especially discounting old stock — can be effective ways to move products. In this same vein, it may also be worth reassessing your inventory forecasting and restocking strategies to ensure they’re aligning with the reality of your business’s activity.

Manage your cash flow to stay prepared

Using these seven cash flow management techniques for managing cash flow can help you prepare for the unexpected and feel more confident in your financial situation. Remember that regularly reviewing your cash flow and continuing to make smart decisions when it comes to the money coming in and out of your business are critical pieces of how to manage cash flow on an ongoing basis. You can connect with a Chase business banker to discuss which products can help improve your cash.

Improving cash flow FAQs

What is cash flow management?

Cash flow management is the process of tracking the money coming in and out of your business.

Why is it important to manage cash flow?

Managing cash flow can help make sure your business is operating in a healthy way and generating value.

What are the differences between cash flow and profit?

Cash flow is the money that comes in and out of a business. Profit is the revenue a business takes in, minus expenses.

How often should I review my business’s cash flow?

It’s a good idea to review your business’s cash flow monthly to stay on top of your finances.

What are the most common causes of cash flow problems?

Late payments from clients, poor cash flow management, lack of a budget and no emergency fund can all contribute to an unhealthy cash flow.