7 Effective Ways Small Businesses Can Manage their Cashflow


According to the US Bureau of Labor Statistics, 20% of small businesses fail by the end of the first year and 50% fail after five years.

After a decade, that number jumps to 80%. These are alarming numbers but there is a number of challenges that lead to the high startup failure rate.

From increasing brand awareness to generating leads, from hiring the right people to managing money, every entrepreneur faces these challenges when they’re starting out.

How they deal with these challenges will determine the success or failure of their startup. We will talk about the money management part of the puzzle in this article to help small businesses manage their cashflows efficiently.

In this article, you will learn about seven effective ways in which small businesses can manage their cashflow.

Have a Long Term Financial Plan

“He who fails to plan is planning to fail.”–Sir Winston Churchill

A long-term financial plan aids small businesses in responding to financial issues and comes in handy when it comes to risk management. It also helps you plan for future expenses that are coming up and give you a clear picture of how you would cover those expenses.

It gives you a breakdown or future blueprint of what percentage of your budget will be allocated to cover different expenses. Moreover, a financial plan can also assist you with tax strategy but can also help you identify sales trends.

Be Clear With Payment Terms

Another common reason why small businesses tend to struggle financially is that most debtors pay two weeks late. This creates a cash crunch for small businesses which makes it harder for them to stay afloat. In most cases, this happens because of unclear payment terms.

That is why it is important for small businesses to set clear payment terms up front and clearly communicate them to their customers so they make payments before the deadline. This way, your startup won’t have to bear financial shortfalls due to late payments from your customers.

Automate Invoicing Process

Another mistake most small businesses make is they take a long time to create and send invoices. Due to this, they receive the payment late. Instead of managing the invoicing process manually, startups should automate the invoicing process.

They can use apps and online tools such as Square invoices to streamline their invoicing process. It also enables businesses to send invoices directly from Square Point of Sale on your mobile device. 

If you want a custom solution, you can hire a software development company that can give you an invoicing software or app that is tailor-made to fulfill your business needs.

With automated invoicing, you can easily track and see the status of your invoices. Moreover, you can even send reminders to your clients and ensure that they make payments before the deadline so you don’t have to face cash shortfall.

Answer The How Question

Knowing how you are spending and collecting money is as important as knowing where your money is going and coming from.

Looking at how you are collecting money will help you rethink payment method options and help you weigh the pros and cons to choose a payment method that is beneficial for both parties.

Similarly, small businesses can decide whether they should indulge in trading or bartering of goods and services by taking a deeper look at their financial transactions. Choose an option that is in the interest of both parties.

Closely Monitor Your Expenses

Small businesses tend to go overboard with their expansion plans and try to scale their business too quickly too soon. As a result, they tend to deplete their budget more quickly in order to grow bigger.

Since they don’t monitor their expenses and costs, they end up losing more money than they should. With little to no cash left in their bank account, they have to rely on debt, which puts their business continuity at risk.

The best way to avoid such a situation is to keep a close eye on all your business expenses whether it is operational expenses, marketing expenses, employee salaries, legal fees, procurement costs, or any other type of expenses.

Your accounting software can help you with that by creating financial reports such as balance sheets, income statements, cash flow statements, accounts receivable, accounts payable, profit and loss.

When you track your expenses, you can manage your inventory in a more efficient manner and minimize bottlenecks and depreciation. 

Manage Debt Smartly

You might not have enough funds to start a business so you decided to seek funding. One of the ways to acquire funds for your startup is by getting a loan. Some businesses might need to take a loan when starting a business while others might need it to survive or thrive. 

One thing you need to keep in mind when taking a loan is that you have to put that money to good use so it can give you a better return on your investment.

This will make it easy for you to repay loans and grow your business at the same time. You can ask your financial advisor or accountant to help you borrow money from places that charge you less interest.

Visualize Financial Data

Crunching in numbers from a report can be tough even for people working in the financial industry and there is also the risk of missing out on key insights and details.

By plotting the same financial data in the form of graphs and charts, you can easily visualize key patterns in financial data. It makes it a lot easier for you to make sense when it is in visual form.

Today’s accounting software has a powerful dashboard that puts everything on a single screen. Whether you want a bird’s eye view of your financial transactions or want to dig deeper into financial data, you can easily do both with financial software and apps.

How do you manage your cash flow as a small business? Let us know in the comments section below.