Financials and Cash Flow

Keep your business healthy by managing cash flow

Learn about challenges and opportunities that may face a business while maintaining healthy cash flow.

Published: October 23, 2015
Updated: February 22, 2017

Why is maintaining healthy cash flow a challenge for so many businesses? One of the most common barriers is simply the fact that business owners are so busy. When you're passionate about what you do and work hard all day running your business, it can be difficult to find time to do the math at night.

Tighten your focus, broaden your view

Entrepreneurs tend to be born optimists. But to be a good business manager, you've got to be both an optimist and a bit of a pessimist. Make your motto "hope for the best, plan for the worst." To be ready for any scenario, take a broader, more challenging look at your business cash flow, identifying potential weaknesses clearly and objectively.

For example, you might experience temporary 'timing gaps' between accounts payable and receivable, whether periodic or random. Depending on your industry, your business may also have seasonal variations. Business owners may underestimate the impact of unexpected expenses, the cost to take advantage of business opportunities, or both. Once you know what your challenges are, you can take the necessary steps to manage them.

Four areas of consideration for managing business cash flow

One can look at cash flow management in four different ways.

  1. Planning – Forecasting and acting to minimize disruptions in cash flow  

  2. Making payments – Determining how to pay vendors and employees as efficiently as possible to control cash flow

  3. Receiving payments – Accepting multiple forms of payment to achieve healthy cash flow

  4. Credit options – Using credit responsibly to maintain a balanced cash flow cycle

Three steps for better cash flow management

So, considering the ways in which cash flow affects your business, how can you start managing cash flow better? Consider a wide range of financial outcomes in detail, some that meet your most positive expectations and some that don't. Then position yourself to succeed either way.

1. Forecast. Start by projecting your future cash flow for a full year. You’ll likely find tools in your accounting software or on the web. Focus on the timing of income and expenses to identify potential gaps, and estimate how deep they’ll be and how long they’ll last. Look for patterns and cycles. Once you make this a regular part of your business planning, you will have the ability to compare your forecasts to reality and improve their accuracy.

2. Plan. Now that you have a broader view, ask yourself how much cash you'll need to cover potential gaps or challenges. It's important to be proactive so you are ready when you do encounter a business problem.

3. Prepare. Preparation means putting the right financial tools in place before you need them. A key resource here is your banker. A business banker can walk you through the available options, including some you might not know about, and help you choose the credit tools that make sense. Remember: the more you talk about your business, your needs, and your goals, the more tailored guidance you’ll receive.

Credit needs and options

Your requirements could be different, but some common credit options to help with cash flow management are a business credit card and a line of credit. The card provides flexibility for immediate, day-to-day needs, while the line offers financing for seasonal or unexpected purchases. Because both options serve different needs, together they make up a highly flexible toolkit that veteran business owners rely on.

For a business credit card, make sure you understand the ins and outs of rates and pricing.  A grace period can work to your advantage, and you should take into account promotional rates. Find a credit card with a strong rewards program so you earn points or cash back for your business spending. And depending on where and how you plan to make purchases, a card that doesn't charge the usual foreign transaction fee could help you conserve cash.

For a line of credit, consider the available credit amount your business will need to cover your challenges and opportunities. Also, consider what rates, fees, term limits, and secured versus unsecured options work for your business needs. Finally, think about all of the ways you will access your account. Whether you use online transfers, a card, write checks or prefer to access your account through the ATM or over the phone, find a line of credit that matches your preferences.

By obtaining your business credit tools and using them responsibly over time, you'll not only help your business cash flow management, but you'll build a strong credit profile in the name of the business, separate from your personal credit history. This can be a huge advantage when the time comes to fund your next big idea!