Home :: Advice :: Start-up :: Best Practices on Cash Flow Management for Small Businesses

Best Practices on Cash Flow Management for Small Businesses

Information is the new currency, and responsible cash management is necessary for anyone who desires to succeed in business, whatever the scale of the enterprise. Cash flow management is the handling of the movement of money in and out of a business. It involves cash the business uses to provide goods or services to customers, and cash collected from the sales or services. Thus, cash flow management describes a process in which cash flow is monitored, analyzed, and adjusted within a business setting. There is nothing trivial in managing cash flows in a small business. Indeed, industry analysts, experienced business owners, and consultants have often pointed out that cash mismanagement is the biggest cause of failure in small business ventures.


These two phrases need to be the small business owner’s guide to creation and maintenance of wealth: positive cash flow, which occurs when the cash being channeled into your business from sales and/or services is more than your business expenses (accounts, salaries, etc.), and negative cash flow, which occurs when the outflow of cash from the business is greater than incoming cash. The latter may result from several factors, including market forces, seasonality of products, bloated workforce, or mismanagement.
Cash flow mismanagement can be directly linked to the main areas that small business owners focus on when they launch their business. First of all, most small business owners are preoccupied with worrying about how they can improve their products to bolster market performance. Secondly, small business owners worry about how to compete effectively and grow their market share.
The inability to concentrate on core competencies is what differentiates small businesses from more established players. Additionally, the incapacity to respond effectively to critical financial demands complicates matters for small businesses. For example, a small business may offer goods and services that are attractive in the market, but may not be in a position to respond to the increased demand. A proper financial management system can mitigate some of these shortcomings.
Best practices
Understanding challenges faced by small businesses is key to good cash flow management practices. As a small business owner, you must be aware of sales cycles and cash collection time-intervals that occur at startup. You must also understand how the market behaves in response to changing economic circumstances; for instance, an economic downturn can result in delayed payments or reduced demand.
Controlled cash flow management practices ensure survival in such critical moments. All financial information pertaining to the business must be aggregated and analyzed for effective decision making. The cash flow management system must close the gap between cash outflows and cash inflows. For instance, a business must be in a position to pay bills even in the face of delayed payments.
Performing routine cash flow analysis and forecasting future scenarios allows companies to take necessary steps that can address cash flow challenges. Sourcing for effective accounting software that can report on various aspects of cash flow is a good starting point. Understanding the financial obligations of the small business is necessary before investing in software packages or web-based solutions.
Most small businesses rely on swift decisions to remain afloat. Therefore, relying on paperwork to make financial decisions is not very helpful. Applications such as cloud computing can effectively integrate cash management activities into a single dynamic system.
Cash flow analysis begins with an accurate recognition of the present and future financial needs of the organization. The small business must have real-time knowledge of cash inflows and outflows. Small business owners must compare their current financial status with their future financial obligations in regard to flow of transactions and maintenance of business operations. This approach will accurately pinpoint a potential cash problem early enough to provide the time and tools required to mount an adequate response.
Share This!
Scroll To Top
Share This!