Back to Blog
Published at | Updated:

4 secrets to cash flow health for small businesses

Two business partners examining cash flow health for their small business.

You’ve definitely heard this one before: Healthy cash flow makes a healthy business. You probably also heard that small and medium-sized businesses (SMBs) like yours are particularly vulnerable to cash flow issues. But, what does that mean exactly, and what can you do about it?

In this article, we’ll explain what is cash flow, why it’s so important, and four simple ways to keep it positive throughout the year.

What’s cash flow?

Simply put, cash flow is the balance of money flowing in and out of your business at a given time. It represents the amount of available cash you have on hand that can be used to cover your expenses and liabilities, including accounts payable (AP), salaries, and taxes, to name a few.

Cash flow can be either positive—in other words, healthy—or negative. Positive cash flow means you currently have more money than you’re spending, which is a good thing. Keeping it this way and avoiding negative cash flow is a constant challenge for many businesses due to late payments, unexpected expenses, or a slower-than-expected season, among other reasons.

While negative cash flow is always a sign of trouble, positive cash flow does not necessarily mean your business is successful. That’s because cash flow takes into account any money (or equivalent) that goes into your business. On top of profit and revenue, this can also include investments or even loans that need to be paid back.

So, even though it’s possible to improve cash flow by borrowing money, this would only be a temporary band-aid. Without revenue and profit—in other words, money earned from customers—you won’t be able to maintain positive cash flow for long.

How cash flow affects SMBs

Your cash flow situation is key to your business’s success. Positive cash flow means that after paying your vendors, employees, suppliers, bills, and rent, you still have enough left to run and grow your business.

Negative cash flow puts businesses at risk of defaulting on debts, losing employees they are unable to pay, and having to forgo new projects and opportunities that require an initial financial investment. One study even found that 82% of businesses that shut down name cash flow issues as the main reason.

This isn’t surprising when taking into account that small businesses typically only have enough cash to survive up to 27 days without income. This means that any dry spell, whether it’s due to bad weather, illness, a global pandemic, or an economic downturn, could mean going out of business in just under a month.

In other words, there’s really no way to overstress the importance of maintaining cash flow health to ensure your business is resilient enough to pull through.

How to evaluate your cash flow health

Creating a cash flow statement is one way for businesses to evaluate their cash flow health. This statement is among the three major financial statements every business needs to produce, alongside the income statement and balance sheet

It can also be helpful to create a cash flow projection for further analysis. This will let you plan for future expenses without hurting your cash flow.

4 cash flow tips any small business can follow

Making slight adjustments to the way you manage your cash, can go a long way to ensure your cash flow is healthy and you have enough reserves. Here are four easy ways to do that, without significant spending or major changes to the way you do business.

#1 Keep a close eye on the money

The most important aspect of maintaining a positive cash flow is knowing exactly where your money is at all times. Keep track of all payments coming in and out of your account, including any current liabilities or payments that are already underway. This helps avoid surprises and gives you enough time to prepare for larger payments without draining your account.

Using a digital tool like Melio to manage your AP and accounts receivable (AR) makes tracking much easier. It allows you to see every payment, both incoming and outgoing, in one place, including scheduled and recurring payments.

Even if you work with a team or an external accountant or bookkeeper who helps you with your AP, you can still maintain control and oversight. Setting up clear invoice approval workflows, ensures you’re aware of all payments coming out and are never caught off guard.

#2 Avoid paying too early or too late

Balance is everything in life, especially in maintaining cash flow health. The trick is to make sure payments are going out just on time, not a minute too soon or too late.

Paying a large bill too early could mean depleting your cash reserves while you’re still waiting for incoming payments to clear, putting you in the negative cash flow zone.

But waiting for the last minute before your due date to cover the bill is also ill-advised. As a business owner, you have a lot on your plate. Should a bill slip your mind this could result in a late payment, damaging your relationship with the vendor or potentially even leading to defaults and litigation. It goes without saying that these will also have a negative impact on your cash availability.

So, if both options—paying late and paying early—can be detrimental to cash flow, what is a small business owner to do? Well, with a digital AP tool, you can schedule all your payments in advance to go out on time. This way you don’t have to worry about missing a due date because of a last-minute oversight on the one hand, or of draining your account by making premature payments on the other.

#3 Make it easier for customers to pay you

Late payments are a major issue for small businesses that causes serious cash flow problems. By giving your customers better payment options, you are actively making it more likely that they’ll pay you and do so in a timely manner. So, if at all possible, strive to accept more payment methods instead of insisting on checks, for example, which often need to be mailed, creating further delays.

This is also an area where digital AR software can help. Melio, for example, allows your customers to pay any way they like—via bank transfer, debit card, or credit card—without affecting the way you get your money. You both get a choice and this goes a long way to accommodate your needs as well as those of your customers, improving your relationships, and creating trust.

Another great way to encourage faster payments is to offer early bird discounts to your larger customers.

#4 Use a credit card for business bills

This happens to every small business from time to time. Even with the best cash flow management strategy in place, sometimes a bill is due now, but you’re still waiting for payment on last month’s project or for that check to arrive in the mail. While you can ask for an extension, your vendor may not be able to accommodate you due to their own cash flow needs.

If you pay by credit card, on the other hand, your vendor will get the money right away while you get to hold on to cash longer, until your next billing cycle. This could mean up to 60 days of additional float. Think of it as taking out a short-term loan without taking a loan and affecting your credit score.

Using a credit card for large business payments also comes with additional perks. And, by perks, we mean cashback, points, and miles that you can use to save some cash on future business trips.

We know what you’re going to say: your vendor probably doesn’t accept credit cards. But, that shouldn’t stop you. With Melio, for a 2.9% fee, you can pay most business bills with a card even where cards aren’t normally accepted. Your vendor doesn’t even have to know, we’ll just send them a check or an ACH bank transfer—whichever they prefer—on your behalf.

The ultimate cash flow hack

There are many good reasons for businesses to use online payment tools but their contribution to cash flow is definitely at the top of our list. They also make payments all the more convenient and efficient for both the paying company and the recipient.

Sign up for Melio today to streamline your business payments while improving your cash flow.

*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.