5 Essential Basics of Cash-Flow Management

Maintaining positive cash flow isn't an exact science, but there are a few cash-flow management best practices business owners can do consistently to help keep their companies in the black.
May 08, 2018

Cash-flow management involves close monitoring of cash flow, which is the amount of cash being transferred into and out of a business. 

If your organization has positive cash flow, it means that the amount of cash available at the beginning of a period (opening balance) is less than the amount at the end of that period (closing balance). In order to remain in business over an extended period of time, an organization must maintain positive cash flow.

I talked to two experienced owners—Brandon Harris, president of content marketing agency NUMedia, and Christine Yaged, chief product officer of finance information portal FinanceBuzz—to share their most critical cash-flow management tips.

1. Stay within your means.

Even if your business is growing rapidly, if you don't practice healthy cash-flow management, you can dig a deep hole from which it's difficult to emerge.

"It's easy to find yourself in credit trouble, missing payroll, taking on expensive loans that further your debt and, eventually, declaring bankruptcy," says Harris.

The greater your comprehension of your company's revenues and expenses, the more you'll identify strategic opportunities to improve.

—Christine Yaged, chief product officer, FinanceBuzz

To help avoid this, consider taking on expenses that your existing business can support.

“It's your job to make sure you can cover your bills so that all stakeholders are satisfied and things are running smoothly," says Yaged. “Otherwise, you'll severely disrupt business operations and spiral from there."

2. Avoid scaling too quickly.

Sustaining positive cash-flow management can mean being patient with your organization's growth, holding off on expansion plans and tempering your excitement about the business's potential.

“Be careful not to overextend with too many early hires and a bunch of credit card debt," says Harris. “Build your war chest organically, and you'll thank yourself in the long term. I've tried the fast, hard money route, and the stress on your business and your life is simply not worth it."

3. Know your numbers in detail.

Cash-flow management is hard to do when your business doesn't have a handle on every cent going in and out.

“Understanding the economics of your particular business, including costs, overhead, salaries, taxes, processing fees, shipping and pay cycles, is challenging, but a worthwhile investment of your time," says Yaged.

If accounting isn't your thing, it may be worth investing in a CFO or bookkeeper.

“Numbers were never a strength for me," admits Harris. “But once I hired a CFO, everything was much clearer and I was able to budget accordingly. You'd be surprised the things that come up when you take the time to dive into the specifics."

4. Ballpark your accounts receivable/accounts payable knowledge.

Even if you get accounting help, strong cash-flow management is still closely tied to an owner's overall knowledge of how their organization earns and spends its money.

Accounts receivable (AR) refers to a company's outstanding invoices or the money the company is owed from its clients. Accounts payable (AP) refers to money owed by a business to its suppliers. Software programs like QuickBooks or FreshBooks give owners a bird's-eye view of AR and AP, helping you separate income and costs into the appropriate categories.

“The greater your comprehension of your company's revenues and expenses, the more you'll identify strategic opportunities to improve," says Yaged.

5. Adjust processes to support positive cash flow.

Many business owners have experienced the fear that comes when cash flow doesn't go in the right direction. If this happens, small changes might make a difference. 

Harris suggests looking into more consistent, recurring revenue streams so your flow is more predictable, learning how to reduce costs and making payment terms quicker.

“Also, put in place the right credit cards and lines of credit to provide some float if needed," he says.

“An underrated resource is small-business credit cards," Yaged agrees. "They're an excellent way to extend payables for another 30 days while also accumulating rewards—as long as you can make payments in full. Other types of credit lines from large banks and smaller regional banks are also worth investigating depending on your situation.

“Negotiate longer pay cycles with your vendors," she adds, "and don't hesitate to ask your team and other business owners for their cash-flow management ideas."

Read more articles on cash flow.

Photo: Getty Images

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