Top cash flow management strategies and best practices

It helps you budget better

Creating a budget is a good idea, but building a well-structured cash flow management strategy is so much better. Why? Because budgets (even accurate ones) reflect how you want your business to run, yet often fall short when it comes to truly representing your finances. 

Cash flow management, on the other hand, boosts the accuracy of a standard budget because it’s a realistic assessment of the actual money that your business has available at any given moment.

It decreases stress

Cash flow management helps you become more aware of and in control of your finances, so it reduces the overall stress levels of running your business. 

Even when cash flow is negative, a cash flow management strategy empowers you with solid data and information you need to make tangible improvements and restore the business’s financial health.

It allows you to forecast potential issues

Another key advantage of adopting a cash flow management strategy is the ability to predict any possible money problems. If you can foresee any pitfalls ahead of time, you’ll be better prepared to deal with them.

It identifies opportunities for growth

At the end of the day, most business owners dream of growing exponentially. A standard VoIP wants to become the best virtual phone system for small businesses, a new brand of healthy snacks aims to take the market by storm, an electric car manufacturer plans to smash its competitors, and so on.

With a cash flow management strategy, you’re one step closer to achieving this. By knowing precisely how much money you have left at the end of a pre-set period, you can decide whether to spend it on something urgent or save it for your growth plans. If your cash flow is positive, your savings will begin to stack up, enabling you to expand your business as you see fit.

1. Build an accurate forecast

A cash flow management solution helps you to identify potential issues before they arise and make accurate financial predictions. It also enables you to learn how to maximize cash flow through smarter planning.

Begin by listing a series of considerations that you will use for your cash flow forecast. These could include predictions on inflation rates, raw materials prices, market demand, investments in marketing, and more. Then, consider any potential price changes for your products or solutions: should you raise some of these prices, keep them stable, or lower them?

All these bits of information will help you to put together a realistic, accurate puzzle of your cash flow, which, in turn, will support better decision-making strategies.

2. Improve your invoice

Cash flow management is strongly tied to good invoicing processes. Why? Because invoices are the ‘proof’ that specific amounts of money have been spent or earned by your business, at particular times, and for specific purposes.

One way to improve your accounts payable and receivable invoicing process is by automating your billing workflows. For example, you can schedule bills to be paid automatically after customer payments are due to arrive so you pay on time, avoid late fees, and ensure you have the cash on hand for those payments. This results in a healthier cash flow.

3. Use the right technology

In an increasingly digital marketplace, you can improve your cash flow management by using advanced bookkeeping software and tools.

Consider implementing a tech solution that can streamline your cash flow management and take it to the next level. Whether you opt for a mobile app for cash flow forecasting or a more comprehensive platform, the right tool can drastically improve visibility and accuracy. For example, many online accounting platforms have automation features for cash flow management processes. These kinds of tools typically have analytics and reporting functions too, so you can easily track and monitor your cash flow. They may also help you generate types of financial statements, like cash flow statements or income statements, to guide decision-making.

Small businesses can also benefit from these kinds of tools. Of course, if you run a small business, you won’t need complicated or expensive software to properly manage your cash flow. A platform like Melio offers advanced invoicing and cash flow management features that are easy and intuitive to use, at an affordable price.

4. Consider financing

Although the term “financing” might sound scary, an occasional injection of cash when your business needs it most can help improve your cash flow management. 

Naturally, this shouldn’t happen on a regular basis — nor should it exceed what your company genuinely needs — but one-off, short-term financing such as a line of credit might help. Once you’re back on your feet and your cash flow is positive, you can focus on maintaining it instead of seeking more financial assistance.

5. Optimize inventory management

Do you have lots of stock sitting idle in your warehouse? Well, that’s certainly not generating any positive cash flow. But with a good cash flow management strategy, you can prioritize stocking inventory you know will sell more while dropping the levels of stock that won’t generate much revenue.

6. Be agile and resilient

The resilience of your supply chain is another crucial aspect to consider when thinking about cash flow strategies. Supply chain logistics can present both challenges and opportunities in terms of cash flow, so it’s a good idea to ensure that your inventory processes are nimble, simplified, and forward-looking.

By doing so, your workflows will become easier to understand and manage, and you will also be able to reduce human error, waste, and potentially expensive delays. Ultimately, your company will become leaner, more dynamic, and more focused on identifying — and applying — cash flow management processes that return exceptional results.

7. Grab early payment discounts

Consider asking vendors and suppliers for an early payment discount. This means that you receive a discount on the total amount owed if you pay the vendor within a specified number of days (i.e. 10 or 15 days, rather than the typical 30 days). 

Conversely, you can offer customers a discount if they pay you within a specified time frame. This is a great way to get money in the bank faster and improve your cash flow in return for granting a small discount.

8. Pay vendors by credit card

By paying vendors with a business credit card, you can earn reward points. These can be redeemed as cash back, which you can put back into your business cash flow. Or you could use the points for travel, saving money and preventing more depletion of  your cash flow.

Don’t forget, your business credit card is another line of financing you can tap into as necessary. It can also help bolster your business credit, which opens the door for additional lines of credit or loans.

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. This also helps you determine how much money a small business should have in the bank at any given time to cover short-term expenses. 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 incoming and outgoing payment in one place, including scheduled and recurring ones.

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 going 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 in 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’re always busy. If a bill slips your mind, this late payment could damage your relationship with the vendor or potentially even lead 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’s 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 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 on time. So, if at all possible, strive to accept more payment methods instead of insisting on checks, for example, which often need to be mailed.

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 accept the money. This accommodates both your needs as well as those of your customers, improving your relationships and building trust.

4. Use a credit card for business bills

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, however, your vendor will get the money right away while you get to hold on to cash longer, until your next billing cycle. This period of extra time is often called a credit card float, and it can offer up to 60 days of breathing room for your finances. Think of it as taking out a short-term loan but without taking a loan and affecting your credit score.

Using a credit card for large business payments also comes with additional perks like cashback, points, and miles that you can use to save 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.