Cash Flow Management for Small Business Owners

A requirement for every successful small business and enterprise.


Cash flow management is the process by which an organization maintains control over the inflow and outflow of funds. The fundamental goal of cash flow management is to ensure that the incoming flow of funds is always greater than the outgoing so that the business sits on a surplus.

There usually is not enough cash surplus

If a business does not anticipate a growth surge, it is a simple matter of reviewing bank statements and current invoices,

However, when a business is expanding, there usually is not enough cash surplus to meet the cash requirements. The additional cash requirement can only be determined by preparing detailed cash flow projections.

Preparing cash flow projections can make the difference between success and failure when a company recognizes the need to have adequate cash for expansion. Decisions made in advance based on future needs will result in reducing the cost of borrowed funds as well as reducing sleepless nights.

Budget and cash flow

Every business enterprise needs a budget, identifiable monetary goals, a suitable bookkeeping system, and a qualified financial manager to keep records current.

In addition, if management plans to categorize the businesses as “successful”, cash flow projections should be prepared and reviewed monthly.

Cash flow management addresses the question – Is there adequate cash available to pay vendors, employees, operating expenses and also allow the company to order needed inventory and supplies, as well make payments on any debt?

In addition, cash flow projections address future cash flow requirements such as the need for more employees, more inventory, the purchase of equipment as well as future adjustments to current expenses such as rent and insurance.

Cash and accounts receivables

Many executives would like to believe that a verbal proposal, a pending agreement, a contract, a purchase order, or a receivable is going to cover operating expenses.

However, invoices are paid with cash on hand – usually in a business bank account. If all customers paid on time, it would be easy to evaluate when cash would be available, but if a business has receivables, or if a company must order inventory for customers, the timing of funds coming in and funds going out is critical.

Management wants to continue to be in good standing with both vendors and customers in order to get the best pricing and the best terms.

Cash flow projections

A savvy financial manager should be able to evaluate a pending contract to determine if the scheduled performance dates and payment dates are both favorable and profitable.

If payment for services is scheduled for 45 to 60 days from the date of completion, and the company is not able to sign new contracts because of a shortage of working capital, it might be advisable to change the terms of payment or offer a discount for early payment.

Management should consider how each contract will impact the availability of working capital for other projects. Realistic cash flow projections allow management to make decisions based on the timing of the payments as well as the gross profit margins.

Projections prepared for internal use provide a basis for establishing a strategic plan for the company.

Once a strategic plan is determined, cash flow projections can be refined to reflect both the short term and the loan term goals of the company. Always consider the intended audience.

Projections prepared for internal use would differ from projections prepared for a lender or an investor, but in all cases the footnotes or assumptions that provide support, must be relevant.

Small business expansion impact

If a company intends to expand it would be wise to plan for the need for additional capital by speaking with a banker to determine if the company is eligible for a line of credit or a term loan.

Planning ahead is important because a banker usually cannot provide loan approval within a few days.  It is more likely to take a few weeks because the banker will request financial information to support the request in accordance with their internal  loan approval policies.

Read the fine print

The biggest mistake made by growing companies is that they do not evaluate their cash flow requirements on a regular basis and often find themselves in a financial crunch.

They reach out for “quick” money which comes with a high interest rate. “Quick” money is meant to be used for a short term – perhaps 30 days, and if the borrower cannot repay the loan within the designated time period, the interest rate accelerates and sometimes the accumulated interest is added to the principal balance.

Every borrower should read the small print before signing any contract or loan document.

Related articles: