Small Business Cash Flow Management: The Ultimate Guide

We’ve said it before, and we’ll say it again: if you don’t know your numbers, you don’t know your business.

Two of the most important numbers a small business owner must know are total cash in and total cash out, otherwise known as cash flow. 

Running out of money is a huge risk for small businesses. While you may know the funds you need for day-to-day operations, you must see the larger picture of revenue generated versus your total expenses.

This article will cover every facet of small business cash flow management, from defining what it is to providing some ideas you can implement right now. We’ll also discuss how your point of sale (POS) system can help you identify opportunities to optimize your cash flow.

An Introduction to Small Business Cash Flow Management

The survival of your small business depends on cash flow. 

As a small business, you’re probably operating on a lean budget. Cash flow measures the amount of cash and cash equivalents you have coming in and going out, and a positive cash flow is a good indicator of financial health.

You need to know the exact amount of funds you have available at any given moment. Why?

• You can support any plans, make informed decisions with accurate information, and know whether you can make significant investments or purchases. 
• You’ll understand where you’re spending and identify areas where you can cut back.
• You’ll also be able to protect your business relationships; the last thing you want is not to be able to pay vendors. 
• Finally, you’ll need funds to drive growth in your business.

If cash flow isn’t your top priority, you risk spending more than you make in any given period. For example, a retail store might forecast higher sales over the holiday period and purchase more stock than usual. They could run into problems paying vendors and covering operating expenses if they’re not managing cash flow well.

Being mindful of spending and investing, and forecasting expenses, goes a long way to managing cash flow well. What else can you do to manage cash flow? Let’s dig in.

First Step: Identify Cash Coming In vs. Cash Going Out

Before you dive into specific fixes or areas of improvement, you need to get an overview of your financial situation. Putting together a cash flow statement that tracks all your business transactions is a great place to start.

It’s important to note that new businesses might rely on cash from financing instead of operations, so to start, a cash flow statement for a new business may look different. Cash from operations is a significant marker of business health for older companies.

Cash Coming Into Your Business

You can measure the cash coming into your business by seeing the actual cash balance in your checking account at any time. This will include cash receipts from sales and bank credit card sales (excluding credit sales that will carry past the end of the month).

You’ll also count loan funds received and other sources of cash, such as interest income, vendor rebates, inventory restocking charges, and any sales of business assets like excess equipment and real estate.

Cash Going Out of Your Business

Much of the cash flowing out of your business will be covering operating expenses such as: 

• Inventory
• Accounts payable
• Salaries
• Rent or mortgage
• Utilities
• Equipment and capital expenses

Then there are costs you might not think of initially, like employment and payroll taxes (FICA, Social Security, FUTA, and SUTA), as well as employee benefits like workers’ compensation, health plans, and retirement plans.

Lastly, the cost of marketing, advertising, and promotions will fluctuate seasonally and as your business grows.

Get Smart with Inventory Management

Inventory management can make or break your success as a small business. Would it shock you that 46 percent of small to medium businesses don’t track inventory or use manual methods? Yet, your supply chain and distribution operations are more straightforward with robust inventory management.

Customers have preferences and want to get their favorite products from your store. Don’t you want to capitalize on that? If you don’t track inventory using accurate data, you won’t be able to. You’ll probably guess what’s popular and hope for the best. 

With accurate inventory data, you’ll ensure you have the right products in stock at the right times.

Would your life be easier if you could automatically replenish stock when running low? Instead of manually counting what’s left and inputting that information into spreadsheets, there is another way. 

Your point of sale (POS) system constantly collects data to help you forecast inventory levels. It’s easy to set reorder thresholds, get alerts when stock levels are low, and even automatically reorder products.

Through accurate inventory and automatic reordering, you’ll know what’s popular and what isn’t. You can please customers by stocking more of your bestsellers and freeing up shelf space with unwanted items.

All of the above results in real-world time and cost savings for your business. Manual inventory methods take up time and human resources. They’re also prone to human error, resulting in lost opportunities and revenue. Instead of spending hours or days counting stock, your employees should be involved in driving your business forward and focusing on the customer experience.

Use Transaction Reports to Forecast Earnings

To make informed business decisions, you need to forecast earnings. While financial forecasts are fundamentally informed guesses, you can back up your guesses with past data to find patterns and trends.

Using retail stores as an example: Would it be helpful to know that sales peaked at a certain time in previous years? Or that specific products flew off the shelves while others didn’t? Was your store busier during holiday periods? Historical reporting can help forecast when your store might be busy and help you make better inventory, supply chain, and budgeting decisions.

Related: GUIDE: How to Use Your Point of Sale Analytics to Increase Profits

Retail stores need to think about the life cycle of products, too. For example, a clothing store will need to think about seasonal fashion trends, and grocers need to consider products that expire, like perishable food items and flowers.

The best POS systems have reports from transactions spanning various periods to help you predict revenue and anticipate consumer demand, month by month and quarter by quarter.

Track Payment History to Forecast Expenses

Ever look at your personal bank account and realize your expenses are out of control? It’s easily done, and it’s probably the seven subscriptions you signed up for without thinking about the total amount. The same thing can happen in your small business.

While forecasting earnings is essential, tracking payment history to forecast expenses is equally important. This can be especially important for seasonal campaigns. For example, will you need to spend more on marketing and advertising leading up to Christmas? The same thing applies to inventory. 

Taking our earlier example of sales peaking at certain times: Forecasting expenses and calculating financial projections helps you form operational plans for when you need to order more of your popular lines and items.

You can then use a break-even analysis to compare fixed and variable costs with revenue to determine how many products you need to sell to cover expenses and  make a profit.

How can a POS system help with expenses?

• Sales reporting: Identify sales trends for specific products and help your business adapt to changes in demand.
• Employee management: Tailor staffing plans to expected foot traffic and consumer demands to avoid overspending on labor costs or underspending in projected busy periods.
• Tracking features for accounts payable: It’s crucial to manage invoices promptly and accurately to maintain good relationships with suppliers. Doing it by hand is cumbersome, and it’s easy to make errors.
• Minimize shrinkage: System features to combat shrinkage are essential. Shrinkage eats into your bottom line. Tools like exception reports and cash draw counts help to track discrepancies easily.

Be Smart with Bill Payments

Consider spacing out bill payments depending on the state of your cash flow. Much like employees are paid on specific days of the month and align their outgoings, you could do the same for your business.

Using historical earnings and expenses tracked in your POS system, you can determine the current state of your cash flow and which approach would work best for you.

You also want to find ways to ensure you’re getting the best deal on utilities and other expenses. Supplier contracts and invoices are often challenging to understand, but it pays to brush up on your knowledge of your spending. Try to avoid automatic renewals and look for better deals.

Have Enough Cash on Hand for 60 to 90 Days

Everyone needs a rainy day fund. You never know when you’ll need extra cash in the bank to pay off surprise bills or cover expenses you’re not expecting.

Your business is no different. To start with, you’ll want to invest as much as possible into fuelling growth. Still, at some point, you’ll want to isolate excess cash flow in an account that you can use to cover payroll and operating expenses for a predetermined period.

With access to cash, you have a security blanket in case disaster strikes — for example, if your store floods. You’ll also be able to withstand multiple weeks of lower transaction volume.

Ideally, you’ll set up a business savings account. It’s a good idea to set up an automatic transfer from your checking account to your savings account. You can always transfer it back if you need to. 

Work With Vendors and Suppliers to Optimize Your Accounts Payables

If you want to optimize cash flow, an accounts payable strategy is a crucial step. Can you afford to pay your vendors at once? If you can’t, the worst thing you can do is upset vendors by continuously delaying payments. You could instead try paying early — some vendors might even offer an early payment discount — and reduce the strain of paying all your bills all at once.

Communication is key. Lack of communication with vendors might lead to delayed deliveries, stricter payment terms, and less willingness to fix issues. Talk to vendors and suppliers to see if they can be flexible with payment terms that fit your cash flow needs.

You’ll want to make vendor management easier, too. You can use a POS system to track all orders, purchases, and interactions with your vendors. Linking inventory data to vendor management is also a plus. You’ll have the information to ensure vendors meet your expectations and identify issues early.

Related: How to Improve Vendor Relationship Management in 4 Steps

If you have business credit cards, it’s wise to pay them off when they’re due or make regular payments. Many credit cards have higher interest rates, so you don’t want to carry a balance. Lastly, take time to review your insurance policies. Often, it’s easy and hassle-free to renew with your current provider, but with some research, you might find a better premium.

Accept Multiple Forms of Payment

Although cash isn’t as popular as it once was, it’s still a type of payment you should accept. Cash can go into your business account immediately; there’s no need to reconcile or wait for it to be released. However, many people use debit and credit cards now.

Revenue from debit and credit cards shows up relatively quickly (debit is more immediate). It’s worth noting that there are processing fees to pay when you accept both debit and credit cards. Fees include transaction fees, service fees (if applicable), equipment setup, and incidental costs like chargebacks.

Apple Pay and Google Pay are convenient for consumers, allowing them to use their smartphones or even smartwatches to make payments, and revenue shows up in your account quickly.

One way to manage fees is to set minimums for debit and credit card purchases, but you can also offer a discount to customers who pay in cash.

Your POS System Can Help You Manage Cash Flow

POS systems track transaction and sales data, employee hours and hourly pay, payment types, and inventory. You can implement much of what we describe above, and the right POS system will provide a customized solution to fit your needs.

If you’re in a surplus, great! If you’re in a deficit, consider taking some or all of the actions described above to optimize cash flow for your small business.

If you have the right POS system, identifying cash in and cash out to forecast revenue and expenses can be relatively simple. But without the right POS system, it can be an exhaustive, time-intensive process. 

POS Nation’s retail point of sale solution includes robust reporting capabilities — prebuilt reports and the ability to create your own — so you can become a business owner who knows their numbers and their business.

A great first step if you want your POS system to help carry the load: schedule a demo with one of our retail experts!