5 Ways To Improve Small Business Cash Flow Management

29 April, 2024
10 mins
Vipul Taneja, VP, Finance Transformation

Table of Content

Key Takeaways
Introduction
Why is Cash Management Critical For Small Businesses?
Common Cash Flow Issues For Small Businesses
What Factors Trigger Cash Flow Issues For Small Businesses?
5 Ways to Improve Your Cash Flow for Small Businesses
How Can Small Businesses Benefit From Highradius Cash Flow Management Software?
FAQs

Key Takeaways

  • Prioritizing cash flow management has never been more critical. Today, small businesses face myriad issues with cash flow management. What are they?
  • How can players navigate cash flow issues in small businesses? How to increase cash flow in business and why is an effective cash flow management system becoming more important than ever? 
  • Lastly, learn how HighRadius helps small businesses transform their cash management with out-of-the-box, automated cash flow management software.
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Introduction

“Never take your eyes off the cash flow because it’s the lifeblood of your business.” Rightly quoted by Richard Branson, the founder of the Virgin Group, cash flow is indeed the engine that drives your business, breathing life into every operational avenue, from procurement to production and marketing to payroll. 

However, cash flow in retail business today faces many challenges, mostly due to late payments by customers, seasonal fluctuations, and other contingencies. These issues not only lead to debt payments and payroll problems but also cause operational breakdowns. 

In this blog, we will dive into some of the most common cash flow issues for small businesses, ways to improve cash flow, and how small businesses can maintain positive cash flow using cash flow management software.

Why is Cash Management Critical For Small Businesses?

Did you know that a staggering 82% of small businesses fail due to the absence of efficient cash flow management or an incomplete understanding of cash flow itself?

The concern is a lot more than the mere question of survival as small businesses need cash inflows to cover expenses, maintain payrolls, repay investors and expand operations – all this while maintaining enough cash to meet contingencies and navigate cash-deficit situations. This makes small business cash flow management more significant than ever before.

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Small businesses today are in dire need of boosting cash flow. It could entail strategies like opting for leasing over purchasing, improving inventory management, regular monitoring of customer credits, choosing saving accounts offering high interests, and more.

Related Read: Six Best Practices Every Cash Manager Should Follow

Common Cash Flow Issues For Small Businesses

A lot of SMEs face multiple cash flow management related challenges which often stem from lack of cash reserves, absence of automation, low profit margins, error-prone processes, etc. 

challenges in small business cash flow management

  • Lack of cash reserves

    Inadequate cash reserves due to inaccurate cash management is one of the main reasons why so many small businesses fail. They often struggle to meet both regular and unplanned needs, leading to insolvency and the inability to meet significant economic downturns or other disruptions. In such cases, the only solution small businesses often have is to rely on sales and timely payments, which in turn leads to weaker cash flow health.

  • Absence of automation, centralization, and standardization

    Small businesses often opt for spreadsheets rather than centralizing the data for forecasting and end up battling with high turnaround time and inaccuracy. By avoiding automation and standardization, you might save money initially, but in the long run would need to address issues such as: 

    • Complex business environment and inefficient risk management due to a lack of standardization.
    • Decentralization leading to ineffective decision-making and delayed reporting. 
    • Poor decision-making and challenges in payment processing due to lack of automation.
  • Manual and error-prone processes

    One of the major cash flow issues for small businesses are the error prone processes that require employees to integrate, enter, and confirm humongous amounts of data on spreadsheets manually and then identify and rectify the errors manually as well. Manual feeding of data leads to not only inaccuracy but also takes away the precious time of the treasury team that could have been employed for a more productive purpose.

  • Lack of a robust bookkeeping system to track cash flows

    Not updating financial records regularly or doing the entire process manually results in poor bookkeeping. This, in turn, can create hurdles like non-approval for financing or being turned down for credit lines. It can also lead to not having enough inventory because of poor cash management, thereby giving rise to: 

    • Credit issues
    • Lack of sales
    • Consistent Loss
    • Ineffective decision making
    • Higher chances of internal fraud
  • Cash flow difficulties and uncertainties

    Many small businesses have a hard time tracking their cash flows owing to their inability to identify how much cash flows into the business and the amount that goes out. Also, factors like difficulties in invoicing and payment collection due to lower profit margins, excessive capacity or inventory investments, etc take a toll on cash flow. Such drivers further result in: 

    • Ineffective risk control due to poor decisions
    • Inefficient operations due to panic purchases
    • Higher levels of withdrawals or borrowings

What Factors Trigger Cash Flow Issues For Small Businesses?

Numerous factors can trigger cash flow problems for small businesses. If left unaddressed, these concerns could escalate into non-payment to vendors and employees, among others in no time. Some of these factors are: 

  • Extended payment periods 

    Many small businesses end up waiting between 30 to 90 days for payment only because they went for longer payment terms. This forces players to dip into their savings while they keep waiting for the cash to flow in.

  • Delayed or incomplete payments 

    While it looks similar to long payment terms, it is a more critical factor as it can block the expected cash inflow entirely. Businesses would still have to pay their taxes on time, further disrupting the cash flow balance. 

  • Excessive spending

    Effective cash management calls for timely and successful investments. But SMEs often spend too much money without thorough analysis of activities such as marketing that results in a negative cash flow. 

  • Seasonal business fluctuations

    Different products sell better at different times of the year; for instance, gift retailing will always sell better during the holiday season than at any other time of the year. Such small businesses, during the off-peak season, may face reduced cash flow.

  • Rapid but unplanned expansion 

    Fast growth is usually commendable, but it can temporarily disrupt small business cash flow. Small businesses might need to stock up, hire more labor to meet the rising demand, etc. This often exhausts all funds, at least until returns are on the horizon.

  • Lower margins 

    Low profit margins result from higher costs and low prices. Running a business at a large scale but with weak profitability margins is a significant challenge since it leads to cash flow problems. 

  • Inventory issues

    While overstocking can restrict your cash flow as the inventory sits unused, not having enough stock, on the other hand, can stop you from fulfilling customer orders and improving cash flow. 

These are just a few of the strategies that you can use to supercharge your cash flows. Read our blog on top 12 strategies to improve your cash flow.

5 Ways to Improve Your Cash Flow for Small Businesses

One of the most important aspects to improve cash flow involves constant monitoring. Here are five ways in which you can boost cash flow in small businesses. Here are 5 ways to improve your cash flow.

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  1. Effective and efficient small business cash flow management

    Effective cash flow management begins with an in-depth understanding of how much money is available to support business operations today and how long it will last. To make sure there’s no hand-to-mouth situation in the business: 

    • Use cash flow forecasting

      Cash flow forecasting helps anticipate future sales and expenses to find out if the business has enough cash to carry out operations without friction. Treasurers often use direct forecasting to predict daily cash in and cash out and analyze: 

      • All cash flow categories (AR, AP, tax, payroll, etc.) 
      • Cash flow for all locations or subsidiary units (US, Canada, etc.) 

      Depending on the cash flow situation, small businesses may decide to focus more on returns on their short-term investments by investing more money for a longer duration. Or they may also prioritize reducing borrowing costs by borrowing less money for a shorter duration. Remember that in either case, your business would still need to hold enough cash to perform trivial yet significant needs like payroll, taxes, debt payments, etc.

    • Pro Tip: 

      To increase the reliability of your cash forecast, the best way is to automate it across all cash flow categories. Automate your daily forecasting and create, run, and compare scenarios for effective small business cash flow management. 

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    • Keep track of cash flows regularly

      Effective cash flow monitoring is one of the most crucial steps to boost cash flow. For instance, the payroll for your labor and employees is scheduled after two days, and the business needs to fund the payroll bank account by tomorrow. Will it need to borrow some money for the same? Or does it have enough cash to close the business today and send cash to the payroll account? 

      Cash monitoring here will help you get a panoramic view of your business cash from all sources and help you navigate such last minute hassles. You can plan for today and then optimize your borrowing and investing decisions while ensuring that your daily operations are carried out seamlessly. The best way is to automate your daily cash positioning and streamline your cash flow management.

    • Understand your revenue streams 

      Best practices recommend that businesses should never put all their eggs in one basket when it comes to revenues. Understand your revenue streams and make sure you are not too reliant on just one source of cash inflow. Else it poses risks to your financial stability in event of unexpected downturns. Consider exploring long-term investment instruments, offering complimentary benefits by collaborating with other businesses, etc. 

  2. Streamline payments to boost cash flow 

    One of the most effective methods to improve cash flow is to streamline your payments and determine your cash positions accurately. Here are a few ways to increase cash at hand while managing payments effectively: 

    • Send invoices without delay

      While most businesses get their payments in hand before they deliver goods, small businesses, especially those dealing in bulk goods, still have to rely on issuing invoices. In such cases, the best way is to automate invoicing by using invoicing solutions and avoiding delayed payments or bad debts. 

      Pro tip:

      Consider using automation tools to streamline invoicing, and ensure swift delivery of invoice across multiple channels. 

    • Set clear payment terms 

      Make sure you keep updating the payment terms so you can receive your outstanding amounts on time. For this, you can:

      • Reduce payment terms to receive faster payments from customers. 
      • Create incentives or offer discounts to encourage early payments. 
    • Timely debt repayment 

      Focus on timely repayments of borrowings so you don’t pay heavy penalties and preserve your cash flow liquidity. The best way is to automate the entire process so you can create, track, and manage debt instruments in a single place and then generate and adjust cash flows. 

      For instance, if the business needs to pay a 5-year term loan for $10M at 6% interest that starts on April 1, 2023, and ends on April 1, 2028, automation can help create expected outgoing cash of $193K every month. Learn more about how automated integration can help you deal with cash flows automatically while managing debt repayments effectively. 

  3. Cut down on expenses 

    This is a crucial step in optimizing small business cash flow. You can improve your operational efficiency while saving costs by letting go of unused subscriptions, excess inventory, unnecessary office expenses, and so on. 

    • Adopt tactical cost-cutting methods

      To avoid negative cash flow, look over the line items where you may cut down and save your cash. 

      • Identify the basic spending requirements. Keep track of costs by dividing them into fixed and variable costs. 
      • Keep an eye on tax deductions
      • Outsource bookkeeping procedures for efficient and error-free auditing
    • Improve inventory management 

      A balanced inventory is one of the most crucial elements for improving cash flow. Digitize your inventory management to streamline operations, reduce waste and replenish stock on time. Various software are available that will help you keep a close eye on inventory-related costs and help you manage excess stock holding your funds. 

  4. Build your funding sources 

    Strengthening your funding sources is critical to ensure that you are secured for any adverse situation and have enough runway to carry on essential operational expenses. To maintain a steady cash flow, you must: 

    • Establish a cash cushion 

      According to financial experts and planners, small businesses must set aside at least three to six months’ money to cover expenses. It will not only help maintain an adequate reserve for contingencies but also provide a cushion during headwinds.

    • Automate bank reconciliation

      One of the major reasons for lower cash at hand are the errors and omissions that occur during processing bank statements and positioning cash manually. Choosing automated bank reconciliations, powered by algorithms and auto-cash transaction creations, helps you: 

      • Track bank connectivity, balances, and reconciliation status at the account level
      • Identify outstanding statement items to handle exceptions. 

      For instance, a business has $20M across all banks but is only expected to have $15M. An automated bank reconciliation in place will help them auto-match bank transactions with planned transactions and identify why the $5M expected wire did not go out as planned, thereby maintaining a stable cash inflow and outflow. 

      Explore more about how automated bank reconciliation facilitates better decision making and builds a better cash management system. 

    • Free up capital by leasing 

      Capital-intensive investments like buying equipment and machinery or vehicles become overwhelming for small businesses in the long run, given the up-front costs. On the other hand, leasing them will help you keep the initial costs lower, free up capital for other significant expenditures and investments, and leverage flexibility to meet the evolving business needs. 

    • Use business credit cards 

      Using business credit cards is a quick solution to mend cash flow gaps. Putting heavy expenditures on company cards will help you build your credit and save money with the cashbacks and incentives added to your company credit card. 

  5. Redefine your business strategies 

    One of the primary reasons behind ineffective small business cash flow management are the gaps in business strategies. This includes error-prone manual processes, the unavailability of current and accurate data and the inaccurate study of cash flow statements. Here are some of the ways to address this.

    • Ensure timely availability of accurate and current data

      This will help you proactively detect risks before they result in losses for the business by having real-time data visibility resulting in accurate cash flow.

    • Reduce errors by automating manual processes 

      Manual calculations of cash flows and reconciliation is always prone to errors and omissions. Automate data collection and reconciliation to cut down the time spent on monotonous yet critical processes and ensure that your team concentrates on more high-value functions. 

    • Analyze insights from cash flow statements 

      The first step in optimizing cash flow is to understand your cash flow statements. Track and analyze data like opening balances, customer receipts, operational incomes, taxes paid, interests on savings or investments, salaries and wages, etc., and gain a holistic view of cash movement within your business. This will also help you optimize expenses, identify where your cash is tied up and avoid the repercussions of late or missed payments. 

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How Can Small Businesses Benefit From Highradius Cash Flow Management Software?

An effective cash flow management goes beyond mere inflow-outflow calculation. To boost cash flow in small business, you must have robust cash management in place that not only helps fortify your business during adversities but also help get an enhanced cash visibility without manual efforts or technical support.

With this in mind, HighRadius brings you a state of the art Cash Management Software. It allows you to boost cash flow by eliminating manual processes and errors and track of cash positions across all locations at one go. Our solution also lets you get: 

  • Complete cash visibility and real-time bank data access with our integrations with all major banks.
  • Easy navigation between dashboards , cash positions, and financial instruments with data auto-filling seamlessly.
  • Reduced reconciliation delays and better decision making with automated cash-to-bank reconciliation. 
  • Streamlined debt and deal tracking through integrated debt/investment cash flows.

The result? You get 

  • 100% automated bank integration

    You can leverage out-of-the-box support for standard banking formats used by all major banks (BofA, Citi, ING, Chase, HSBC, etc.)

  • 100% cash visibility

    Our configurable balance viewer gives a 360-degree view of all bank balances across all accounts in a central location.

  • 70% increase in cash management productivity

    Your team can focus better on supercharging financial performance when they don’t have to deal with error-prone, manual processes.

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FAQs

1) What is cash flow?

Cash flow is the money moving in and out of the business. When cash comes in, it’s cash inflow, like getting interest on deposits. Cash outflow is when it goes out, like, paying salaries or taxes. Note that cash inflow should be more than outflow at any given time to sustain operations. 

2) What are the three types of cash flow?

Operating cash flow (OCF), Investing cash flow (ICF), and Financing cash flow (FCF) are the three types of cash flows. OCF refers to the money received or spent to perform core operations. ICF is the cash flow from investing activities. FCF is the net cash flow used to fund the business.

3) What causes a lack of cash flow?

A lack of cash flow can be due to numerous reasons. Some of them include insufficient cash in reserves, higher upfront costs, holding excess stocks, absence of robust bookkeeping to track credit issues, lower profit margins despite a higher sales volume, excessive spending, etc. 

4) Why is healthy cash flow important for retailers?

A healthy cash flow in retail business means the business is financially sound and has sufficient balance in reserves to carry out operations. It is significant because it helps: 

  • Day-to-day expenses like purchases, rent, utilities, etc. 
  • Buy adequate stock to meet customer demands. 
  • Make timely repayments of borrowings. 
  • Provide cushion against unexpected adversities. 

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