Cash flow management basics for businesses

Managing cash flow — how much money is going out the door versus how much is coming in — is an important consideration for every business, and it may be particularly relevant for businesses that may have more limited financial resources. Maintaining a positive cash flow can help businesses meet their short-term and long-term cash needs and potentially invest in growth.

To better manage your business’s cash flow, consider these ideas. Before taking any of these steps, always discuss what is right for your business with your accountant or tax professional.

“Business owners are often, by necessity, very focused on what’s happening here and now, but they also need to plan ahead,” says Eric Calaman, business banking executive with Bank of America. He advises that business owners frequently estimate their payroll costs and other expenses, factor in the amount and timing of invoices and bills that will need to be paid, and project earnings expectations for three months, six months and a year out.

Looking ahead may help businesses understand the timing of incoming and outgoing cash flows. This can provide sufficient time to assess potential funding needs and seek financing, if appropriate. “You want to project several months out so that if you need a short-term loan or need to transfer money from one account to another, you have enough time to do that,” Calaman says.

Incoming and outgoing cash flow can provide a good indication of the business’s financial position. A cash flow statement can be used to track the amount of money coming into the business through sales, loan proceeds and interest income — and out of the business for inventory and other purchases, payroll, rent, utilities, taxes and loan payments.

A cash flow statement can also provide information about how much cash is available to the business. If incoming revenue covers total expenses for a given period, the business may be operating at or near its break-even point. New businesses that are not generating significant revenue or are in the pre-revenue stage may track their burn rate — the pace at which they spend money before reaching positive cash flow. Reports such as an operating budget, which tracks overhead, labor and production costs, and profit and loss projection can help produce a better understanding of a business’s cash flow situation.

Businesses may use a variety of tools to create a cash flow budget and update it regularly. Many businesses opt to use online tools to streamline the process. “The best way to monitor cash flow is to use a budgeting tool that can categorize expenses and identify any potential shortfalls before they occur,” Calaman says. The Bank of America® Cash Flow Monitor is one example of a tool that can be used to monitor a business’s cash flow performance. Identifying potential shortfalls in advance may provide additional time to find and implement a solution.

Generally speaking, positive cash flow — when a business takes in more money than it spends — can allow a business to invest in growth. If cash flow from operating activities exceeds expenses, businesses may use available funds for a range of activities that can help the business grow, such as marketing or paying down debt. When cash flow improves over time, it may allow the overall business to expand.

If a business is experiencing negative cash flow, spending more money than it earns, it may evaluate operating costs and revenue collection practices as part of managing cash flow. 

Reducing expenses is one way to improve cash flow. Changes in spending on labor, office space, production, supplies and other common expenses may affect the available cash a business has on hand.

1. Managing cash reserves and short-term funding

• Maintaining a cash reserve to help cover unforeseen expenses and emergencies
• Establishing a line of credit to address short-term funding needs, particularly in industries affected by seasonality
• Using a business credit card for certain short-term expenses
• Evaluating merchant services providers based on factors such as how soon the business can access funds from card payments

2. Developing inventory management practices

• Keeping records up to date to optimize ordering
• Maximizing use of raw materials and reducing waste
• Evaluating in-stock inventory levels and required lead times before placing orders for additional inventory

3. Ensuring prompt collection of receivables

• Invoicing customers the same day a sale or service is completed
• Establishing and adhering to prompt payment terms — which might be payment due on receipt or within 30 days (“net 30”) — and setting the expectation from the start
• Offering discounts for quick payments and making deposits promptly, as fast payments may speed up a business’s cash conversion cycle
• Implementing penalties for late payments and being diligent about taking action when necessary
• Implementing electronic invoicing — software-based services such as BILL or FreshBooks can automatically invoice regular clients
• Accepting multiple payment types — from credit and debit cards to contactless, swiped and keyed payments to mobile or electronic payments such as Automated Clearing House, Zelle® and other electronic fund transfer systems

4. Optimizing accounts payable

• Analyzing the business’s spending habits; revisiting and reviewing costs regularly
• Choosing vendors that are flexible on payment terms
• Prioritizing invoices according to due dates to avoid the strain on cash flow that may come from paying every bill immediately
• Prioritizing credit card bills by both due dates and interest rates; for instance, paying the cards with the highest rate first, then moving on to lower-rate cards
• Taking advantage of trade discounts when the business has excess cash
• Using less costly forms of credit, such as low-interest bank loans, especially if the business needs to carry a balance
• Establishing multiperson sign-offs for expense claims, overtime, check writing and payroll to bring accountability to the spending process
• Reconciling frequently and regularly to produce an up-to-date snapshot of where the business stands

5. Leasing equipment instead of buying

• Managing a monthly payment instead of making a large up-front purchase can minimize short-term impact to cash flow
• Leasing instead of buying may help the business avoid having to upgrade or resell existing purchased equipment
• Avoiding commitment to long-term ownership may allow the business to upgrade or change equipment based on needs and customer demands

Many business owners don’t realize the resources available to them at their financial institutions. A business banker can provide information about banking products, services and resources related to short-term and big-picture financial planning. If a business experiences a shortfall, a banker can discuss available products and services to meet its needs.

Financing may be used by businesses to address seasonal downturns or periods of lower revenue. Options include revolving credit (such as credit cards and lines of credit) and term loans for a fixed amount, which may be secured by collateral or unsecured. The suitable solution for the business may depend on the amount needed and whether the need is short-term or ongoing. For a more detailed overview of how these choices differ, see “Financing options for businesses.”