Cash flow management for small businesses

Your profit and loss statement can show a profit for a month in which your bank balance fell. Common reasons: customers have not paid their invoices yet, you bought inventory or equipment up front, you paid down a loan (which reduces cash but is not an expense), or a large tax payment came due. Watching both numbers, and understanding why they differ, is the core of cash flow management. Our bookkeeping basics guide explains the statements involved.

Cash flow comes up again and again as a challenge in the Federal Reserve’s Small Business Credit Survey (opens in a new tab), which asks owners about their finances and financing.

A short-term forecast lists the cash you expect to receive and pay, week by week, so you can see low points in advance. A spreadsheet is enough.

1. Start with your current cash balance across business accounts.
2. List expected cash in for each week: customer payments by their likely date, not the invoice date, plus any other receipts.
3. List expected cash out for each week: payroll, rent, suppliers, loan payments, card payments, taxes and subscriptions.
4. Calculate each week’s ending balance and carry it to the next week.
5. Mark any week that falls below the cushion you want to keep.
6. Each week, replace the oldest week with actual figures, add a new week at the end and adjust.

• Invoice as soon as work is delivered, not at month end.
• Set clear payment terms and state them on every quote and invoice.
• Ask for deposits or progress payments on larger jobs.
• Make paying easy, with several payment methods.
• Follow up on overdue invoices on a set schedule.
• Review which customers pay late, and adjust terms for them.

• Pay bills on their due date, not early, unless an early-payment discount is worth it.
• Ask suppliers about payment terms that line up with when you get paid.
• Keep inventory lean; stock on the shelf is cash you cannot use.
• Review subscriptions and recurring charges regularly.

Many owners keep two cushions in separate savings accounts: a tax reserve, funded from each deposit so estimated and year-end taxes do not drain operating cash, and an emergency buffer for slow months or surprises. How large each should be depends on your expenses, seasonality and risks; an accountant or an SBA resource partner (opens in a new tab) can help you think it through. The SBA’s manage your finances (opens in a new tab) guide covers the basics.

Financing can make sense for a timing gap, such as covering payroll while waiting on a large customer payment or buying seasonal inventory that will sell. A business line of credit is one tool owners use for recurring short-term gaps, and working capital loans are another. The SBA’s loans overview (opens in a new tab) describes its programs.

Financing does not fix a business whose costs are higher than its revenue. If the forecast shows a shortfall every month, borrowing only delays the problem and adds payments.

Questions to ask yourself before borrowing:

• Is this a timing gap, or a business losing money?
• How and when will this be repaid, and from what cash?
• Does the repayment schedule match how long the need lasts?
• What is the total cost, including all fees, compared with alternatives?

• Using short-term, high-cost funding to pay for long-term needs.
• Taking a new advance or loan to cover payments on an earlier one, sometimes called stacking.
• No forecast at all, so every shortfall is a surprise.