Tips for Effective Cash Flow Management in Small Businesses

Managing your company’s cash flow is more than just keeping enough money on hand; it’s ensuring your business runs smoothly and is prepared for the future. A healthy cash flow can allow your business to grow while also providing protection from financial setbacks. In the event of a cyberattack, cash flow can be significantly impacted, highlighting the importance of understanding your company’s cash flow and having proper procedures in place to minimize potential disruptions to daily operations.

Cash flow basics

Cash flow is the increase or decrease in the availability of funds a business has within a given period. For small businesses, positive cash flow means that your product or service is producing more revenue than the amount being spent on day-to-day operations. If the reverse is true, your business is undergoing negative cash flow, which could cause operational disruptions if not managed carefully. You can get an accurate estimate of your company’s cash flow by reviewing how much money the company has on hand once all financial activities have been taken into account and comparing it to a similar period.

Below are basic types of cash flow:

• Operating cash flow – This is the amount of money a business generates from routine operational activities. It reflects how your essential business activities perform, allowing you to compare against another period to help identify trends that could be affecting your company’s bottom line.
• Investing cash flow – Funds used for long-term investments like real estate and expensive equipment are categorized as investing cash flow. Investing may temporarily cause your cash flow to drop; however, it can be seen as a good sign if the investment is targeted towards growing your businesses.
• Financing cash flow – This is an analysis of the movement of dollars between a company and its financial stakeholders. Reviewing this financial activity helps determine how organized your company is and how invested key stakeholders are during a certain period.

It is valuable to study these different kinds of cash flows to better understand your business and identify areas that may require further analysis or improvement. Now that you’ve reviewed these essential cash flow concepts, let’s consider a few cash flow management strategies you can implement right away.

Managing cash flow

You should never be taken by surprise by how much—or how little—liquidity your company has on hand. Below are three fundamental tips for effective cash flow management to help your business make sound financial decisions and save for future growth opportunities.

• Reduce unnecessary spending – Lowering expenses is a direct method to manage cash flow. It can be easy to just focus on increasing sales and selling more products; however, it is equally important to keep operating expenses low. Regularly evaluating cost-effectiveness is a great way to help identify opportunities to save funds, such as renegotiating pricing with suppliers, buying wholesale, reducing wasted materials and eliminating any unused or unnecessary subscriptions.
• Manage available inventory – Closely controlling inventory can have a positive impact on your company’s cash flow. Think of your products as a representation of potential cash. The longer they sit on a shelf or on the floor, the longer their monetary value is tied up. Try to coordinate sale promotions and other tactics to keep inventory moving, and it will help strengthen your company’s cash flow.
• Set invoicing and payment timelines – Creating and following a timetable for processing invoices and payments is another strategy to effectively manage cash flow. You do not want to be in a position of having to wait for a customer to come through with an important payment that may cause you to delay paying a routine business expense. You can also create a policy to request an initial deposit to help ensure your cash flow interests are met.

Have a cybersecurity plan

Cyberattacks are no longer a rare phenomenon. Small businesses are often viewed as easy targets due to having limited cybersecurity resources and expertise, while larger organizations can be seen as high-value targets due to having more financial assets and valuable data.

A cyberattack has the potential to spiral into a cash flow crisis if not handled promptly. Without a cybersecurity plan in place, your business could face immediate expenses to address the threat. There may also be a direct financial loss and an indirect cost from operational downtime and data restoration, which tend to have long-term impacts, like affecting the company’s reputation.

Below are some tips to help you establish or revise a cybersecurity plan for your business.

• Prioritize and protect – Determine the data or systems your business relies on the most and prioritize protecting access to items that would cause the greatest disruption if they were to be compromised.
• Establish and rehearse an action plan – Schedule periodic reviews of business continuity plans to ensure employees understand their responsibilities in the event of an attack.
• Prepare for financial risk – Estimate with insurance partners and your IT department the cost your business may incur after a cyberattack and work to reduce that value.
• Educate – Provide employees with resources on cybersecurity best practices to increase understanding and aid in the prevention of an attack.

Additionally, you should review what means are being utilized by your business in the management of cash flow. If incoming and outgoing funds are still being tracked via spreadsheets, an upgrade may be in order. Modern accounting technologies, such as cash flow forecasting and the automation of accounts payable and receivable, can assist in the prevention of human error and simple mishaps that could end up costing your company.

We’re here to help

Trustmark knows that as a business owner you have a lot on your plate. Let our financial professionals help your business succeed by providing trusted advice and access to our comprehensive suite of business banking services, including online account receivables and payables solutions to help you better protect and manage your money. To learn more, visit Trustmark's Cash Management Services page or contact our Corporate Treasury Services team at 855.731.0243.