How Small Businesses Can Increase their Cash Flow

Ryan Beitler

October 02, 2019

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Cash flow is essential to any business, but it doesn’t necessarily mean that your business isn’t making money. A company can be making money and still have a problem with cash flow, it is a separate issue. However, without cash flow it is difficult to expand and grow. Particularly for small businesses, cash flow can be quite harmful. So, how can small businesses increase their cash flow to be increasingly stable and in a position to go to the next level.

What is Cash Flow?

Entrepreneurs everything need to understand and manage cash flow. It’s an issue that impacts almost every facet of the business. Simply defined, cash flow represents the movement of money in and out of a business. Think of it this way, the flow of cash represents all the transactions in your business’ bank account. When there is enough money to cover bills and other essential expenses, you have positive cash flow. When the cash flowing out of your business exceeds the money coming in, that’s when you have an issue with the flow of funds.

Another way to look at the issue of cash flow is to consider accounts payable versus accounts receivable. It is important to make a distinction between accounts that are payable and receivable. One is your assets, i.e. a positive balance of cash or money in your account, the other balance rounds up liabilities like debt and monthly payments that you owe.

When these two get mixed up, you will see an imbalance in accounting. Accounts payable is liability that tracks money leaving the business, which could include employee payroll, loans from banks, and other expenses. Assets are accounts receivable, which keep track of the money entering your business, such as revenue from customers. The difference between accounts received and accounts paid is how you determine the profitability of a business model.

Why is it Important?

Cash flow is significant for any business, but it is particularly crucial for small businesses and start-ups. The flow of currency in and out is like the lifeblood of your business. To fund expenses that include expanding or growing a certain aspect of the business require money on hand, and if you don’t have money for day-to-day expenses, you may be motivated to take out credit. According to the site MoneyPug, which is used to find short term loans, you need to invest money to expand, but you shouldn’t necessarily do so with a short-term loan. Seasonal businesses are also susceptible to cash flow problems, with the off season being a tough time when cash flow is critically low. As a business, what can you do to fix these problems?

What Can I do?

Business owners and entrepreneurs need to learn how to manage cash flow early on to avoid these problems. There are a few simple things that you can do to make sure you get ahead of it. First you should compile a cash flow statement analyzing what needs to happen for cash flow to be free. This can be pretty simple, with a lot of accounting software including these reports as well as cash from operations, cash from financing, and cash from investment in their reports.

You should also be diligent about forecasting your expenses. By using a cash flow statement, you can see what months you will likely feel the like of flowing funds. After identifying those periods, you can create an expense forecast that estimates your operational costs during those months. To figure out what rent, payroll, and other expenses cost, you will need cash on hand. You will be able to plan for needing extra cash.

Finally, cash flow management is dependent upon strategies to avoid problems with the flow of funds. One strategy is to shorten the cash flow conversion period so you can bring in money faster. If you are planning on expanding, you might need fund injections during certain periods. But when you know what is coming, you’ll have a much easier time responding. Whatever field you’re in, cash flow is integral. Plan ahead to avoid problems and your business will be stronger and healthier for it in the end.