Managing cash flow for small businesses: A quick guide
Discover key insights on managing cash flow for small businesses in 2025. Learn essential practices to ensure financial stability and growth.
Did you know that 99.9% of all businesses in the US are small businesses? Yes, small businesses are the main driver of the economy. At the same time, approximately 18% of small businesses close down within their first year.
There are many different factors that contribute to the success (or failure) of small businesses. One of these is cash flow. In fact, 82% of shuttered small businesses place the blame on cash flow issues.
But why? What makes cash flow so important? And how to manage cash flow in small business to survive and thrive? To answer these questions, let’s first explore what cash flow means and how it impacts your small business.
So, what exactly is cash flow?
If you’re wondering what is cash flow in business, it refers to the movement of cash (or cash equivalents) in and out of your business over a set period of time. When more cash is coming in than going out, it’s known as positive cash flow. On the flip side, when the outgoing cash exceeds the incoming cash, it’s called negative cash flow.
Proper cash flow management is essential to keeping your business afloat, but it does more than that. It also helps to make your business resilient, flexible, and future-proof. For instance, having a handle on your cash flow allows you to:
- Forecast expenses
- Prepare for slow months
- Set and adjust your prices
- Gain clarity on your spending
- Make timely payments to your vendors
- Know when you’re ready to scale up
What’s the difference between cash flow and profit and loss?
Cash flow sounds somewhat similar to another common business term: profit and loss, or P&L. However, they’re not the same.
Understanding cash flow vs profit vs loss is key to knowing how well your business is actually performing. So, what’s the difference between cash flow and P&L?
Firstly, cash flow is measured at any given moment, while P&L reflects revenue performance over a period of time. Secondly, cash flow encompasses all money going in and out of the company, including loans and other monetary sources, while P&L covers just the profits (revenue minus expenses) derived from business operations.
Given these differences, it’s entirely possible to have a positive cash flow without being a profitable business, and vice versa. Let’s look at some real-life examples of how this works.
Cash flow positive vs. profitable: Real-life examples of cash flow
Imagine you’re opening a pet grooming business. You make a business plan and get a small business loan from a local bank in the amount of $50,000. That loan represents money flowing into the business, producing a positive cash flow. But if you don’t book any customers during the first two months, you’re not generating revenue, which means your profitability is nil. This is an example of positive cash flow, without being profitable.
The reverse is also true. You can have a negative cash flow, while being profitable. Let’s say you sell second-hand cars, and most of your customers use the buy now, pay later option. You pay $1,000 for a car, then resell it for $1,500, with the customer paying $500 down and $1,000 due in six months. Even though you sold the car for a $500 profit, the cash generated from the sale is $500 and the rest is accounts receivable. Your cash reserves have actually gone down by $500 even though you netted a profit from the sale. This is an example of negative cash flow, while being profitable.
It’s worth noting that negative cash flow puts business owners in a tough spot, no matter how many assets or accounts receivable they’re owed, so planning ahead for how much cash a business should have on hand is important to its success. It’s essential to have sufficient liquid cash to pay vendors and meet financial obligations as a business. In other words, profit alone isn’t enough. Positive cash flow is essential for keeping your business healthy and in a position to grow.
Types of cash flow
There’s more than one kind of cash flow, and understanding the differences can help you manage your cash flow better.
Operating cash flow is the cash flow from your everyday operations: incoming money you have from sales, and outgoing money from expenses like payroll, rent, taxes, and vendor fees.
Investing cash flow is money linked to your long-term investments, like investing in a startup in your industry. The initial investment would give you negative cash flow, but upon selling the startup shares you would have positive cash flow.
Financing cash flow is the money used to fund the company, like selling ownership shares to investors or paying dividends to investors. This kind of cash flow is especially key for startups seeking rounds of investment.
4 common cash flow issues plaguing small businesses
Nearly half of small businesses say that “uneven cash flow” is one of their biggest challenges. It’s not uncommon for business owners to struggle with cash flow management and for several reasons. Let’s review four of the most common issues with cash flow for small businesses:
Changes in the revenue stream
Fluctuations in revenue due to seasonal demand or market trends can disrupt cash flow, making it challenging to cover expenses during slower periods.
Slow-paying customers
Late or delayed payments from customers can strain your cash flow, impacting your ability to meet immediate financial obligations and invest in business growth.
Operational expenses
Covering ongoing costs like rent, utilities, inventory, and payroll while maintaining sufficient working capital can be a delicate balancing act. This becomes even more complicated when you’re faced with unexpected expenses like repairs or a lost contract reducing your expected income.
Limited access to traditional financing options
Traditional financing opportunities come with strict requirements and lengthy approval processes. This makes it difficult for small businesses to secure the necessary funds in time to save their cash flow.
How to manage a positive cash flow
Cash flow challenges are an inevitable part of being in business. Maintaining a positive cash flow is even more difficult during times of inflation, rising prices, and supply chain delays.
There is no magic formula to cash flow management. However, there are cash flow management strategies can give your business the stability it needs to grow steadily. There are certain rules you can follow to help achieve positive cash flow, maintain it over time, and protect and even grow your business. Even small cash hacks—like early payment discounts or credit card scheduling—can help maintain healthy liquidity.
Here are some tried-and-true tips for how to manage business money more effectively that every small business owner should keep in mind:
Make payment terms work for you
The longer you can hold onto your cash reserves, the better. For example, send vendor payments as close to the due date as possible, without crossing over into late payment territory. Small changes in timing can make a big difference when figuring out how to maximize cash flow. That way, you maximize your cash flow while still keeping your financial commitments.
Consider the cost of goods sold
Making adjustments to the cost of goods sold (COGS) is a simple but effective way to bring more cash into your business. These small adjustments can add up to big results when you’re figuring out how to increase cash flow. Buying in bulk and finding a more affordable supplier are two of the most common methods, but feel free to get creative when it comes to reducing your expenses.
Handle late payments properly
Late payments can throw off your cash flow, so make sure your clients and customers are crystal clear about when their payments are due. Clearly specify the payment due date at the outset. Send a reminder before the due date to make sure the bill has not been misplaced or forgotten. Charging late fees for overdue payments is another way to protect your cash flow and give clients a reason to pay on time. In addition, you may choose to offer an early payment discount. This incentivizes customers to pay you faster, boosting your short-term cash flow.
Simplify your cash flow management with Melio
Melio makes cash flow management easy for small business owners and solopreneurs by putting time- and sanity-saving tools at your fingertips. Whether you’re using a cash flow app or a more robust platform like Melio, having a centralized tool that lets you monitor, schedule, and optimize payments is key to forecasting your business’s financial health. With Melio, you can schedule outgoing payments in advance, send invoices and reminders with just a few clicks, and even set up two-way sync with QuickBooks to generate up-to-date cash flow reports and other types of financial statements whenever you need them. With accurate data at your fingertips, building a cash flow forecast becomes quicker and more reliable. Melio also enables multiple payment options that can benefit your cash flow.
You can pay by card—even to vendors that don’t accept card payments,* meaning your vendor receives the payment on time and you can defer payment to the next billing cycle. This gives you access to a credit card float, helping you hold onto your cash longer while still paying vendors on time. You can even pay over time or instantly and hold onto cash longer. Sign up today to start simplifying your business payments and better managing cash flow.
*Subject to card network limitations.
*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.
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