A Guide to Cash Flow Management

Cash flow is the most important aspect of your small business. How well you manage your cash flow determines how well your business runs. Poor cash flow management can result in a lot of pains in your business, from being unable to restock supplies to being unprepared for immediate needs. With these 5 tips, you’ll better understand how to properly manage your cash flow so your small business can excel.

Tips for handling cash in, cash out, and cash at rest

1. First-year Challenges

Small business owners in nearly every industry cite cash flow as the most formidable hurdle to success. In an exclusive survey of nearly 500 business owners from a variety of fields, 30% cited cash flow as their biggest challenge in the first year and 40% need to borrow money to reach their goals. In industries where business is seasonal and payment processes are protracted, keeping up with cash flow gaps can be a challenge. To help stem that tide, many successful business owners take precautions early on, making sure they keep as much cash as possible on hand, securing a line of credit and picking up extra jobs in anticipation of the slow season. 

2. Figure Your Benchmarks

While cash flow issues affect every small business, they’re particularly tricky for those in labor-intensive industries like restaurants and construction. According to a 2016 J.P. Morgan study of small business transactions, restaurants have the most volatile ledgers, averaging $957 in daily inflows versus $968 in daily outflows.1 Construction businesses average $445 in inflow and $438 of outflow, while retail averages were $409 and $413. For beauty and wellness businesses, those numbers were $216 of inflow and $219 of outflow. Businesses in labor-intensive industries tend to possess far less of a cash buffer than those in capital-intensive fields. The most successful entrepreneurs in those labor-intensive fields tend to have a strong sense of their daily inflow and outflow, and the average small business has enough cash flow to cover 27 days of expenses.

3. Devising Innovative Strategies

Only 39% of small business owners consider themselves generally knowledgeable about accounting and finance. In addition to hiring accounting professionals and relying on technology and software, those business owners often devised their own cash flow strategies once they gain a firmer grasp of their situation. Perfecting these strategies is a matter of trial and error. Business owners talk about invoicing in smaller increments, developing relationships with vendors in order to gain more flexibility and finding “anchor clients” who offer steady income — all in the service of cushioning cash flow issues. More than three-quarters of small business accountants also now offer additional services like cash flow consulting to help their clients devise an overarching plan for their cash in, cash out and cash at rest. Forty-four percent of small businesses cite cash flow as one of their top accounting challenges.

Another strategy is using the proper tools to see a complete view of all your financial data. With tools like My Insights, you can connect all of your bank accounts in one place to see a full view of your business’s performance and cash flow patterns. With this info, you can take on potential opportunities or avoid unplanned expenses.

4. Loans and Lines of Credit

Once small business owners master their cash flow, growth becomes the next priority. This often means gaining access to additional capital. Twenty percent of businesses surveyed by American Express Business Blueprint™ said that in looking ahead, they needed more money in order to execute their long-term goals. However, loans and lines of credit can be difficult to come by in the early stages, so a number of business owners turn to friends and family or utilize credit cards. Small business owners are also turning to online lenders in record numbers, some of which can offer funding in just 10 minutes.

5. Utilizing Additional Cash for Growth

Once businesses have found their footing and acquire access to additional cash, the question becomes: What’s the best way to spend that money going forward? The majority of small business owners said they would use increased cash flow to spark growth in some way.2 Thirty-three percent would purchase additional inventory and equipment, 28% would expand operations and 10% would invest in employees. Whether ramping up technology or inventory, focusing on marketing and finding new customers or hiring new employees, successful small business owners say they succeeded in large part because they were willing to invest their profits back into the aspect of the company they felt needed the most attention. For every dollar lent to small businesses by online lenders, sales increased by $2.31.

1. Source: JPMC

2. Source: C2FO