Managing and Tracking Small Business Cashflow


Cash flow is defined as the money that moves into and out of your business over a specific period.

Cash comes in and goes out of your business constantly. It comes into the business as ‘income’ from customers and clients who buy your products and services. It flows out of business in the form of ‘expenditure’, such as rent, wages, monthly loan payments, payments to suppliers, etc.

Positive Cashflow

‘Positive cashflow,’ i.e., when you receive more income than you pay out in expenditure, must be maintained if you are to remain in business. If you have positive cash flow, your business will be able to pay its bills when they’re due and meet any unexpected costs. 

Negative Cashflow

There may be periods where you experience ‘negative cash flow,’ for example if you buy a new piece of machinery or a payment from a customer is overdue. Potentially, you may have to rely on a bank overdraft or short-term loan to cover this cash flow shortfall. However, as long as the negative cash flow has been planned for and your business reverts to a positive cash flow position, it should not cause a serious problem for your small business.  

Cash flow is usually tracked over a standard reporting period such as a month, a quarter, or a year.

Why is Cashflow so Important for Small Businesses?

Cash flow is critically important to the success of your small business.

A lack of cash is one of the most common reasons why businesses fail. Even the most successful businesses can quickly find themselves in trouble if their cash is tied up in late or unpaid invoices and they can no longer pay their bills. 

One of the most difficult periods for cash flow is in the early days of your business. While you’re busy setting up the business, you will have many expenses but no clients or customers to create an income stream. That’s why it’s important to consider your cash flow situation from the outset and make sure you have a temporary source of cash such as savings or an overdraft to keep you going while you wait for the money to start flowing in. 

Keeping a close eye on cash flow is also particularly important for seasonal businesses. If you have a large fluctuation in income at different times of the year, you must carefully track and manage your cash flow. Although managing cash flow in this type of business can be tricky, it can be done, and we’ll show you how. 

How to Manage Your Small Business Cashflow

So, what can you do to make sure your business doesn’t run out of money and fail? 

(1) Create a Cash Flow Statement and Forecast

The best way to keep a close eye on cash flow in and out of your business is to create a cash flow statement and forecast. These very simple financial documents will give you a snapshot of your actual monthly cash flow and your forecast monthly cash flow. 

These days, your accounting software should have a cash flow statement as one of its standard reports. However, if not, these documents are straightforward to create yourself and do not require any prior accounting experience at all. This simple cash flow template and accompanying article from the Association of Chartered Certified Accountants includes everything you need to know. 

(2) Think about Your Payment Terms

Another big step in managing your small business’s cash flow situation is choosing appropriate payment terms. Many businesses that sell directly to the end customer take payment immediately. For example, a restaurant is paid once the customers finish their meal, while a plumber or electrician will be paid as soon as their work is done. 

However, businesses that sell to other businesses often offer credit in payment terms of 7, 14, 30, 60, or even 90 days. Extending credit to customers and clients can be an effective way to attract new business and build trust, but it will also directly impact your cash flow. Offering payment terms of 60 days might be attractive to a customer who will be able to ‘buy now and pay later, but how will you operate while you wait for the payment to be made? 

There’s also the perpetual problem of late payments to think about. Late payments are a leading cause of cash flow problems, so it’s worth thinking about how you’ll encourage your customers to pay on time. You could consider several strategies, such as charging interest on late payments, offering early payment discounts to incentivize customers to make quick payments, or imposing ‘due on receipt payment terms. 

(3) Choose who you do business with very carefully

As a small business, you must be selective about who you work for and credit-check new prospects before you agree to work with them. Turning down potential new contracts based on a credit check is certainly not easy. It takes a steely resolve, but it could be the best thing you do for your business.

Just imagine what would happen to your cash flow situation if you spent a month fulfilling an order for a single customer, only for them to accept the goods and refuse to pay. You could take legal action to recover the money you are owed, but that will be expensive and take time. During that time, how will you function without buying new stock, paying your bills, or paying employee wages? 

Credit agencies such as Creditsafe and Experian allow you to credit check a company online instantly. If you see that the business has a less than perfect credit history, you might decide not to grant them credit or even choose not to work with them at all. Monitoring the credit activity of key individuals who are involved in the company could also be beneficial. If they’ve been associated with other organizations that have failed or are the directors of multiple companies simultaneously, it might be better to stay away.

(4) Set expectations and make it watertight

Assuming a new customer has an excellent credit record, and you’re happy to supply your goods or services, you now have to make sure they understand the terms under which you agree to do business. Although a verbal exchange might be used to agree to your payment terms initially, you should make sure that it is followed up with watertight payment terms and conditions in writing. 

That should cover everything from delivery terms to what will happen if you’re not paid. Writing up your payment terms might sound time-consuming. Still, depending on the nature of your business, you may find that a standard set of terms and conditions available online that covers all the necessary details. 

(5) Get to know the people behind the payments

To reduce the likelihood of payment delays, it’s always beneficial to build relationships with the individuals making the payment. Checking that the invoice has been sent to the right place and all the necessary details are correct will help to reduce delays. When submitting the invoice, it’s also worth asking if there’s any reason why the payment won’t be made on time, as most people will do everything they can to not go back on their word.