Cash Flow and Cash Management for Small Businesses: A Comprehensive Guide

As an entrepreneur, you might have many questions about small business cash flow and cash management. How much money do I need? When should I pay for things? Should I be keeping my funds in the bank or investing them elsewhere? The purpose of this article is to answer all your questions so that you can make sound financial decisions for your small business.

Ron Pearson

Cash Flow and Cash Management for Small Businesses: Comprehensive Guide

As an entrepreneur, you might have many questions about small business cash flow and cash management. How much money do I need? When should I pay for things? Should I be keeping my funds in the bank or investing them elsewhere? The purpose of this article is to answer all your questions so that you can make sound financial decisions for your small business.

Table of Contents

1. What is cash flow?

2. Why is cash flow important?

3. How do you calculate cash flow?

4. Common cash flow issues (and solutions!)

5. How can you improve your cash flow?

6. What is free cash flow?

7. What is a cash flow statement?

8. What is a cash flow analysis?

9. What is cash flow forecasting?

10. What software can I use for cash flow management?

1. What is cash flow?

Simply put, cash flow is the net movement of cash in or out of your business.

What are cash inflows and outflows?

  • Cash inflows are the amount of cash your business brings in from operations, investments, and financing activities.  (Summarized in your accounts receivable).
  • Cash outflows refer to all money that is paid out during a certain time period. (Summarized in your accounts payable).

Cash flow is categorized into three sections:

  • Operating: Cash flow from the business's main operations. For example, when goods are sold, services are provided and cash is gained from this.
  • Investing: Cash flow from long-term investments in assets, loans, and payments, such as the purchase or sale of a property.
  • Financing: Cash flow with regards to how a business is funded, including investments made by the owners, investors, or the receipt or payment of bank loans.

2. Why is cash flow important?

Cash flow is important for small businesses because it's the life-blood of your business. Without cash flowing in, there won't be any new products to purchase or inventory to maintain - and if you don’t pay employees on time, they will quit! If cash isn't coming in, then eventually everything stops happening at once.

Rather obviously, the Small Business Administration says that “inadequate cash reserves” are the top reason startups don’t succeed but the facts don’t lie, understanding cash flow is vital to the success of your business. It must be prioritized by any business owner.

Operating cash, of course, is the fuel that keeps your business going. First off, because generating cash, at least for most, is the primary reason for having a business in the first place. And also because it's vital for ensuring that your bills, expenses, and staff are paid and that you can continue trading.

Knowing and understanding your cash flow for this month and the next will enable you to underpin any decisions with it. Making the right choices will ultimately make it more successful and result in more cash!

How do you know if your business is profitable?

You can calculate whether your business is profitable by adding up the worth of all of your assets (including your cash inflows) and subtracting your cash outflows. If the result is positive, you have positive cash flow and your business is profitable. If the result is negative, you're operating with negative cash flow and will need to investigate how to increase your profitability.

3. The cash flow formula

The formula for cash flow is cash = money in - money out. Simple as that.

Alternatively, you could calculate it by totaling the net values of your cash for a period from the three categories we mentioned in part 1:

  • Operating activities
  • Investing activities
  • Financing activities

What is the formula for cash flow from operating activities?

Operating activities = net income + non-cash expenses + changes in working capital.
  • What is net income?

Net income represents the amount of money remaining after you've been paid, and made your payments. It is commonly referred to as your 'bottom line'. You can calculate net income using the formula:

Net income = total revenue - total expenses.
  • What are non-cash expenses?

Non-cash expenses are expenses that are reported but not paid during the given period.

Examples of non-cash expenses:

  • Depreciation
  • Amortization
  • Unrealized gains and losses
  • Stock-based compensation
  • Provisions for future losses

4. Common cash flow problems to avoid

What is the difference between profit and positive cash flow?

You're making a profit, but you have no cash. 'What could be going on here?' you think. Let's look at a simple example.

Cash is the amount of money a business has access to, in real-time: money in hand, petty cash, and the totals of any bank accounts. This is the net sum of your cash flow: the discrepancy between what’s coming in and what’s going out (again, remember this can be a negative value).

Profit is the financial gain (or loss) that comes from a business’s operations. Profit does not take into account whether a sale was made in cash or on credit. So, profit does not reflect the ‘real’ amount of money a business has. They're still both important metrics, telling different stories.

Why do small businesses have cash flow problems?

  • Stock control problems

Stock control, like so many things, is a careful balancing act.

Order too little stock and you won't be able to fulfill demand or act on opportunities of increased demand. Order too much and you tie up cash flow in products that will give immediate returns and will cost you in storage charges, decreasing the amount of cash available for day-to-day operations.

  • Hefty Payment Terms

52% of business-to-business payments are still done by Bank Transfer which means that most small businesses rely on their customers to manually make payments within the agreed payment terms. This can have a dramatic effect on your accounts receivable.

Businesses should always seek payment terms that are agreeable to both parties and require cash payments within 30 days of the invoice date and they should only offer credit if it's required by law or their industry best practices.

This goes both ways as well, it is also important to ensure you're not paying your suppliers too quickly. As a small business, it's important to not become a banker for your clients and suppliers.

  • Overspending and overtrading

It's so easy to spend cash when you're trying to grow your business. But don’t be tempted unless you have it planned. A budget that is feeding your cash flow will ensure that you know how much you have available to spend and if it is not in the budget then before you buy it, make sure this won't lead to a negative cash flow.

Similarly, overtrading can be detrimental. If you need to purchase materials before you get paid for fulfilling a job, you can end up spending more than you have in the bank, relying on overdrafts and loans. If your invoices, then, aren't paid on time, you can end up in tricky situations where you're having to scrounge for cash, or paying your expenses late. So often the cause of brilliant businesses failing.

  • Seasonality

Seasonality has a huge effect on your cash flow, for the same reasons we've mentioned above. If you haven't had much business through February and March, but know that April is your best month, buying materials, investing in marketing, and making preparations for April, you'll need to pay out a lot before seeing any returns.

5. How can you improve your business cash flow?

Your cash flow is crucial to keeping your business on the straight and narrow. There are lots of procedures that can be put in place to encourage best practices for your cash flow management.

Encouraging payment collection

Late payments are one of the biggest problems facing today's small businesses. In a recent survey by Xero and PayPal, it was found that 48% of invoices were paid 14 days late, on average.

When overdue invoices stack up, small businesses start to suffer, there just aren’t the cash reserves to continue to pay staff, suppliers, stock, etc without it coming in the top!

How to get paid quicker?

  • Use Direct Debit. GoCardless will automatically collect payments for any invoice on the due date, whether recurring or ad-hoc. (GoCardless users spend 84% less time chasing unpaid invoices and 82% report improvements in their cash flow!)
  • Be insistent. Your customers are less likely to put off paying when they know there are strict conditions in place. Ensure you have an agreed payment date, method, and warnings of the relevant charges for late payments.
  • Automate it. Automating your invoicing systems with cloud-based credit-control tools like Chaser can make it much easier to ensure payments are made, sending reminders to your customers and having invoices chased if they're made too late.
  • Keep payment terms tight. For new customers try and get paid in advance or take a deposit.  Only extend customers into credit terms as they earn your trust. If the credit score of any customer is bad - take it all upfront.
  • Keep good records. Keep records of all of your due invoices, bills, and expenses. If you don't have automated systems like Xero, QBO, or Dext, you'll need to ensure you're collecting your payments on time to build efficient processes and set expectations for your customers.


  • Cut your costs

One benefit of building long-term cooperative relationships with your suppliers is being able to negotiate better deals with them, with reduced pricing or extended repayment periods. You will be a customer they will be relying on their cash flow for their next year and so may be willing to reduce costs in order to keep you.

Other ways to reduce your costs include evaluating and reducing your expenses, innovating new ways to make the most of materials (using leftovers), consolidating your production/office space, reducing paid marketing spend (and investing in organic marketing instead), going paperless. The options are endless.

  • Delay expansion

If your cash flow is a pinch point, consider the money you're investing in the financing portion of your business. Are you reinvesting a lot? Are you trying to grow too fast, or at a bad time? Review the next 12 months as predicted in your cash flow forecast, maybe there is a more stable time from which to grow. Use data to drive decisions, not personal ambition (although a healthy portion of this goes a very long way too!).

  • Consider leasing

Start-up costs are often high and early on your business cash can be stretched thin trying to cover them. Leasing allows you to decrease the initial spend so you've got more cash in the bank. It also makes your costing more predictable as you won't have to pay maintenance fees.

Leasing is more expensive in the long run so it worth picking and choosing which items you lease so as not to affect the long-term business cash flow. Consider it for the highest ticket items and the tools you don't need every day.

  • Optimize your inventory

As we mentioned earlier, buying too much stock, or having excess stock on hand can be detrimental to your cash flow. By optimizing your stock, you can ensure these issues are well avoided.

This is basically to make the stock as lean and beneficial as possible.  You cannot do this without a solid cash flow forecast which has been built to account for the seasonality of your business and has accurate growth predictions.

6. What is free cash flow?

Free cash flow describes the cash a company has, after its operations, equipment, and assets have been taken care of. Where cash flow provides a snapshot of the cash going in and out of a company, free cash flow is the cash remaining.

Having largely positive free cash flow could tell you that you have money that can be reinvested back into the business, paying off your debts quicker, or getting you in the good books of potential investors.

How do you calculate free cash flow?

This simple formula is suitable for anyone or any business owner and is a perfectly acceptable method of working this out.

Free cash flow = cash flow from operating activities - capital expenditures.

7. What is a cash flow statement?

A cash flow statement provides a summary of the inflows and outflows a business has - including investments, operation costs, etc. Whilst these reports will be demanded by boards, investors, and banks, it is a solid business practice to use these from the beginning of any business (it is also never too late to start!).

What's included in a cash flow statement?

They are comprised of three sections, broken down the same way we broke down cash flow earlier:

  • Operating Cash - This is your net income, plus or minus increases in your current assets, liabilities, and expenses.
  • Investing - This reflects the increases and decreases in long or fixed-term assets.
  • Financing - This reflects any increases or decreases in long-term liabilities/debt/capital.

What is cash flow from operations?

This is the first section of your cash flow statement and includes transactions from all operating activities. These activities would include things like sales, paying employees, purchasing supplies, etc.

What is cash flow from investing?

The second section of a cash flow statement, detailing investment gains and losses. This could include the sale or purchase of properties, the acquisition of other businesses, investing in new machinery.

What is cash flow from financing?

Cash flows from financing is the final section of the cash flow statement, providing an overview of cash flow concerning funding the business. This includes a business's equity, debt, and dividends.

8. Cash flow analysis

What is a cash flow analysis?

A cash flow analysis is an investigation of a company's inflows and outflows. The analysis takes a set period and shows the movement of cash flow within that time. This is then examined, to look for trends and weak points, to inspire future strategies.

Why is cash flow analysis important?

Cash flow analysis is important to ensure you have a realistic overview of your business's cash position. Accrual accounting is the accounting method used by most companies, where revenue is reported as it's invoiced, rather than when the company receives payment. Expenses, too, are reported when they're made, rather than when they're paid.

As a result, companies using these methods will find that their cash position seems inaccurate.

Creating a strategy based on your cash flow

Your overall business strategy should be built upon many of the factors affecting your business. Your cash flow is one of those factors, influencing when you decide to make or implement decisions for your business. Knowing where the weaknesses in your cash flow are and where they come from, will help you boost your business's performance.

9. Cash flow forecast

What is cash flow forecasting?

A cash flow forecast predicts your cash inflows and outflows over the coming months or years. By including what you expect to earn and what you expect to spend, a cash flow forecast makes it easy to see what your bank balance is likely to be at a particular point in the future. This will help you prepare for seasonal changes, busy and quiet periods and provide a roadmap on which you can plan your business’s journey.

What is the difference between a cash flow and a profit forecast?

A cash flow forecast is based around when income is received and when costs are paid for. A profit forecast, however, is built around when income is invoiced and when costs are incurred. As we discussed earlier, creating an invoice and being paid are two different things, happening at different times. Things like late and partial payments are not accounted for in a profit forecast but are in a cash flow forecast.

What are the benefits of cash flow forecasting?

Armed with the knowledge of what you’ll have in the bank, your cash flow forecast will allow you to make educated decisions at the right time for your business. Here are some examples of questions that cash flow could help you answer:

  • Can I start creating a new product/service?
  • Can I open a new office/location?
  • Can I start selling in a different area/country?
  • Can I afford another member of staff or outsourced assets?
  • Can you take more money out of your business?
  • Are you at risk of running out of cash?

How do you create a cash flow forecast?

  • Select a period of time (the further into the future you look, the less accurate you can be)
  • Estimate all your cash outflows: bills, expenses, salaries
  • Estimate your cash inflows: sales, tax refunds, grants, investments
  • Start with your opening bank balance (the cash you have right now), from there, plot when you will receive and make payments throughout your chosen period
  • Use the closing cash balance of a month as the opening balance of the following and repeat the process.

10. Cash flow software

What is the benefit of using cash flow software?

If you've made it to this point, hopefully, cash flow's feeling a little simpler. But, improving your cash management strategies might seem like a huge task to take on. So, it may be of comfort to know that there are a number of cash management tech solutions to help.

  • Accurate, timely, up-to-date

The automatic retrieval of data eradicates the chance of human error in data input. With multiple daily syncs, Futrli ensures the data you're presented with will show you the most up-to-date version of your business. When making decisions, you need the best, most accurate data possible, to support and inform your choices.

  • Time-saving

Utilizing software unites all of your data into one place. Trawling through reports or hopping from system to system uses valuable time and makes it easy to lose track. Software like Futrli makes it simple to stay on top of everything, by bringing everything into one place.

  • No-admin

Not only does software adoption eradicate the room for error in data input, but it eradicates the need for you to do it all! Software like Futrli pulls information from a number of integrations. For financial data, we integrate with Xero and Quickbooks, the industry-leading cloud accounting software. So forget huge admin costs and man-hours, it's done for you.

What tool is right for me?

Futrli provides several tools to help you manage your cash flow. For a smaller business or those just starting out with cash flow management, we have Futrli Predict.

Predict is perfect for any small business looking for an automated cash flow analysis tool, and to keep a closer eye on their accounts receivable and payable.

For those with bigger, more complex businesses, we have Futrli Advisor. Deep business reporting, bespoke KPI dashboards, powerful forecasting… the list goes on. The key to running a successful business is to know three things: where you’ve been, where you are, and where you’re going and Futrli Advisor will help you nail all three. Find out more here.

Both Predict and Advisor act as fantastic cash flow management systems (and so much more), helping you to stay ahead of the game, in control of your business, and paving your way to success.


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