6 Business Cash Management Tips

Susan GuilloryUpdated April 22, 2023

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Part of running a successful business is keeping an eye on how cash flows in and out of your company. This is so important that there’s actually a term for it: business cash management.Having a firm grasp on what revenues are coming in and where you’re spending your business’s hard-earned money is key for maintaining your company’s financial stability. What’s more, it can help you develop and put strategies in place for managing your money more effectively.Read on for a closer look at how small business cash management works, along with simple ways to improve your company’s cash flow.

What Is Cash Management?

Business cash management involves having an understanding of and strategy for all the things you do with your company’s money, from selling products to buying office supplies. It also includes any investments you may make in the hopes of getting a positive return. If you take out financing to fund business activities, such as a line of credit or a business loan, this is also part of cash management.Essentially, if you’re doing it well, business cash management should ensure that you always have enough capital for your day-to-day expenses, as well as for opportunities that may arise for long-term growth. However, not every business has an active cash management system and processes in place, and that’s likely to work to their detriment.

Understanding Assets and Liabilities

When we talk about cash flowing in and out of a business, we are, to an extent, talking about assets and liabilities. These are two key terms in business cash management that you should be aware of.Generally, assets can be physical items, such as equipment you use for your business or inventory. But in this case, we’re referring specifically to cash assets. The cash you have access to and could use to cover expenses is an asset, as are your outstanding accounts receivable. If your business has a savings account, for example, that might be considered an asset. On the other side of the equation, there are liabilities. These are things like your outstanding accounts payable and any payments you owe for small business loans due within a year. On the most basic level, your cash flow is reflected in your assets (money from sales, interest, and any other sources) for a period of time minus your monthly liabilities (payments your company has to make, business rent, salaries, manufacturing costs, etc.) during the same period. There are more nuanced ways to calculate cash flow. But ultimately, the goal of business cash management is to have more assets than liabilities, giving you a positive cash flow.A cash flow statement sums up both your assets and liabilities. It also indicates how cash-fluid your company is currently.At any given time, you should be able to look at your cash flow statement to understand the financial health of your company. If your liabilities outweigh your assets, it’s time to rethink your cash management strategy, either by eliminating some of your expenses or by finding a way to increase revenues, such as raising your prices or going after a different market.

Why Business Cash Management Matters

Cash flow matters more than you might think: In fact, cash management is often cited as one of the top reasons why small and midsize businesses fail. For many of those failed businesses, simply having a better cash management system so that owners could understand where money was flowing in and out might have kept them alive.High revenues may be reassuring, but they don’t automatically mean business success if you’re spending money heavily and aren’t aware of the damage that can cause down the road. Let’s say you have a narrow profit margin, but you’re making enough to pay your daily expenses. Then one day, your company truck breaks down. You now have to replace it, and you don’t have the funds to do so. Maybe your credit isn’t stellar, so the only loans you qualify for come with high interest rates. You now have to spend more than should have been necessary to keep operating simply because you didn’t have the foresight to plan ahead for emergencies like this.Good cash management should help ensure that you not only have enough to operate smoothly day-to-day, but also have some cushion in the case of unforeseen expenses.

6 Tips to Improve Your Business Cash Management

Now that you’ve reviewed the importance of cash management for your business, let’s look at a few ways you can get a better handle on it for the long-term growth of your company.

1. Know Your Expenses

Do you really know exactly where your business is spending money? If you’re busy running your company, you may not be reviewing your accounts regularly enough to understand your cash outflow.Often, businesses have ongoing expenses they’ve forgotten about and no longer need, such as a software subscription. Canceling expenses like these can free up cash for more important investments.Make a point of regularly reviewing your expenses — monthly is a good goal for many small businesses — and determining whether they’re all imperative for the growth of your company.

2. Negotiate What You Pay

Not all business owners realize this, but it’s often possible to negotiate what you pay your vendors, particularly those with whom you have a longstanding relationship or place large orders. If you order inventory or supplies, you might offer to place a larger order in exchange for a small discount. Or you might ask whether paying your invoice early could save you some cash.Finally, don’t be shy about comparison shopping. You may discover you can save significantly by switching vendors.Recommended: What is Trade Credit and How Does It Work?

3. Use Systems and Software

There’s an entire world of software and systems designed specifically to help with cash flow management for small businesses. You may be able to save time and effort by looking to a preexisting system rather than reinventing the wheel.At a bare minimum, you can use accounting software that will allow you to send invoices and track expenses as well as generate reports (like that cash flow statement) so you can keep an eye on your finances. Depending on what software you want to get (and/or pay for), you may be able to get extras like time tracking and project profitability projections. Once you have software in place, you’ll want to learn how to use it (and ensure that any other employees who deal with finances also understand it) and review your accounts regularly.

4. Set Up a Payment Policy

Late-paying clients can disrupt your cash flow and prevent you from paying your own vendors on time. To make sure you get paid faster, consider setting up a payment policy.There are two primary strategies here. You can charge a late fee, which would typically be a percentage of the invoice balance. Any invoices paid after, for example, 30 days, would incur this fee. Usually customers don’t want to pay more, so they’ll be more inclined to pay their invoices on time.Another option is to offer a discount for early payments. Again, this can be a percentage of the invoice total, or even a flat rate. Yes, you do stand to lose a little profit by doing this, but having clients pay on time can help keep your cash flowing predictably.

5. Build a Nest Egg

One way to keep from having a cash crunch is to set aside a portion of your profits in a savings account. That way, should your business suffer a loss (such as a vehicle that needs to be replaced, as discussed above), you’ll have cash to cover it.Having savings set aside can also save you money. The most obvious alternative to paying out of pocket for an unexpected expense is to finance it, and that comes with interest and fees. So if you have the money in savings, you can likely pay less for those rainy day expenses.

6. Be Smart About Financing

Sometimes financing, through short- or long-term business loans, may be the best or only option for getting the capital you need, whether it’s to pay for an emergency or to take advantage of an opportunity that could take your business to the next level.Not all financing is created equal, so it’s important to explore your options and find the best rate and terms for your business. If you have excellent business or personal credit, you will probably have many options at affordable rates, such as Small Business Administration (SBA) loans. If you don’t have good credit, you will likely have fewer options, and those may be more expensive. You can also consider options like inventory financing loans. You’ll need to weigh the benefit of having cash on hand against the price you’ll pay for that privilege.One good cash management practice is to work on building both your business and personal credit scores so that, should you ever need to take out a loan or line of credit, you might qualify for lower rates.You may be able to build your credit by taking out small loans, trade credit with vendors, or business credit cards and then making sure to pay your balance on time and (when you can) in full. Over time, this may build your scores and help you qualify for better rates and terms in the future.Recommended: Business Emergency Plan

Business Cash Management Is Your Responsibility

As the owner of a business, smart small business cash management is your responsibility. Even if you don’t have a degree in accounting, it can be in your business’s best interest that you have at least a general understanding of how assets, liabilities, and cash flow affect your day-to-day operations as well as your long-term financial situation.Using strategies like the ones discussed here, you can ensure that you’re actively managing your money in a way that will make your business continue to grow.Looking to grow with a small business loan? With Lantern by SoFi’s online lending tool, you can spend less time searching for financing and more time expanding your business.Find the right fight financing solution for your small business on Lantern's Marketplace.

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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