Managing cash flow: the ultimate guide

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Effectively managing how money flows in and out of your business is paramount for its ultimate health. No matter how good your goods or services are, or the benefits it gives to your customers and society, if your cash flow is always on the negative side, then there is a problem.

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Answer Adeosun
Dec 26, 22 · min read
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What is cash flow management?

Simply, cash flow management is all about managing how money goes in and out of your business to ensure your accounts are balanced and there is profit. You should know that your cash flow is bad if there is more debit than credit. That is to say, if you have more people owing you or you are not making as many sales as you are producing your goods, then there is a problem somewhere and it must be fixed.

Now, it is important to know here that without knowing what your business’s cash flow looks like, it is impossible to manage it. It is therefore paramount that you first draw up a cash flow chart, depending on your preference. And then you can make up your mind on the steps to take on its management. 

But first, let us take a look at why it is important to manage cash flow in any business anyway. 

Importance of effective cash flow management

  • Helps with budgeting

When you know the cash flow of your business, you can effectively make reliable budgets for a period. One mistake small businesses especially make is not paying attention to how money moves in their business and they over budget or spend. 

Simply having money in the bank does not translate to being buoyant, so to say. There could be money in the bank but you have pending debts to pay. Spending such money frivolously could land your business in trouble. Therefore, when you have drawn up a cash flow chart for your company, you will know which money to spend and how to spend them. Budgeting for the next quarter or year would then not pose a problem.

  • Prepares you for a shortfall period 

If you manage your cash flow well, you can prepare for imminent shortfalls. This simply means that you can prepare ahead of time if there is going to be a time when a check might bounce. In such cases, you can make calls out to people or delay handing out checks for a period till you are sure you are good for it. 

Apart from giving you peace of mind, it makes you look good to your creditors and suppliers. If you are always handing out checks that bounce, you are sure that you may soon be facing eviction from your landlord, no supply from suppliers, etc. So, always endeavour to be on top of the cash flow management for your business at all times.

  • Helps you make feasible projections

Making projections about what you expect for sales and production in your business is paramount. That way, you will not produce more than you are expected to sell or produce less.

If you understand how sales are for a period, you can project increasing or reducing production for that time.

A quick example is an ice cream truck. Even without checking your cash flow, you understand that it is less likely you have people coming in to buy your goods during winter. So, it would be prudent to make less ice cream in the winter and more in the summertime. 

In other words, keeping up-to-date with the cash flow in your business can give you an insight into the highs and lows of the sale period and you can make feasible projections for production.

  • Facilitates loan-taking decisions

Peradventure you may need to take a loan to boost production or expand your business, a good cash flow management can give you an edge as well as credibility with your financier. This is because it will give you an idea of how much loan to take that you can pay back within the expected period without hurting your business’s bottom line. Essentially, cash flow management helps you predict how much money you could need to take your business up a notch.

  • Impacts growth management

As pointed out in the last bullet point, a good cash management culture can help you plan to grow your business. It will give you an idea of whether you have enough cash to grow the business or if you need to take a loan to supplement what you have.

When you manage your business and its cash flow properly, you are sure that you will not take too much or too little loan when necessary. It can also tell you if the time is ripe for growth or not and what adjustments to make to make the business more profitable and efficient.

Types of cash flow

  1. Operating cash flow is generated from operations expenses such as salaries, purchases, and COGS (cost of goods sold). So, when all you are taking into account is the costs for operating the business from goods production till it reaches the final consumer, you are working with an operating cash flow.
  2. Investment cash flow – here, costs of investments in stocks, bonds, or treasuries as well as inflows from interests and dividends will be included alongside the operations costs and profits.
  3. Financing cash flow – this takes into account any loan or grant you may have taken to run your business as part of the company’s debt, especially if you have to pay back certain amounts over a given period.

10 tips for effective cash flow management – how to manage your cash flow

These tips are culled from the Chartered Institute of Credit Management guide and they will help you if you adhere to them.

  • Know, understand and manage your customers or clients

It is very important that you know to whom you are providing goods or services. It is better you get their full details including their credit history before going into business with them. Never be afraid to ask for any information you need from your client. If they have a history of defaulting on payments, it would be a good idea you steer clear of them. Otherwise, you risk losing a good chunk of cash that should keep your business positive. 

So, if the customer is a business or company, you should check out their information from the HMRC or Companies House database so that you can get paid for any goods and services rendered, even if the business or company becomes liquidated or dissolved.

Another important thing that may not be quite necessary but is not a bad idea either is to check if the customer or client has signed up for the Prompt Payment Code. Not all businesses are signatories to the code but if they are, at least you are sure that they are not obligated defaulters and you will get paid eventually if you go into business with them.

Lastly on this note, you should set clear-cut rules for your business. Remember the saying that business thrives when friends and family pay? You cannot afford to lose business profits because you are slack in your management style. Set rules and abide by them to a fault so that your clients and potential clients will know what you stand for before going into business with you.

  • Agree on payment terms before transacting business

Never make a sale of goods and services until you have a clear-cut mode of payment and when the payment will be made. There are a lot of fraudulent persons and businesses out there and they can disappear in a blink too. 

Therefore, make sure to draw up invoices on time and before making sales, with stipulations of when you are expecting to be paid. 

Always be mindful of the accuracy of the content of the invoice, and the clear intent of the wording in any agreement you draw up too to avoid misconceptions in the future. 

Note that, including clauses of charging extra if the customer pays later than due is a good way to gain their attention so that they will not default.

  • Stay ahead of possible defaulting

Here, you should know that including future expenses in your cash flow chart can help you stay ahead of possible defaulting. This way, you will not overspend on non-essentials. Also, if for some reason you will not be able to make payment to employees or suppliers, you should talk to them before the payment is due. You can negotiate a new payment time if you have a legitimate reason for defaulting. 

When you do this, you are giving yourself and your business a positive outlook. Remember that, you are a client or customer to your suppliers and if you would not like your customers to default, then you should not default too. Treat your suppliers as you would want your customers to treat you.

  • Insure your business!

Yes! This is very important. We know insurance companies get bad reps for always looking for loopholes in your agreement so that they weasel their way out of paying your insurance sometimes. However, they are like the better option when you are stuck between the devil and the deep blue sea. It is better to be credit insured than not being and losing your business altogether when there is a bad debt.

Getting credit insurance can even assure financiers that you will not disappear with their money if they give you a loan or grant. There are benefits you can gain from the government and even NGOs when you have insurance for your business.

  • Stay ahead of shortfalls.

There are some ways you can prepare for a shortfall such that you are not under too much pressure and you can conduct business at ease. The first factoring is where the factor pays about 80% or more of what a customer is currently owing provided you have an invoice to back it up. That way, you have a huge part of the money even though the customer is yet to pay up. 

Another way is using an invoice discounter where an amount of the invoiced cash is paid to you in the hope that the customer will pay the discounter at an agreed time. Of course, that could pose a problem for you because you will have to refund the discounter if the customer refuses to pay.

You can also use your company’s assets to take a loan. In this case, if you do not pay back in time, the assets can be auctioned off your hands by the financier. Otherwise, you can request your client to pay a percentage of their invoice ahead of delivery for a discounted percentage, of course.

Lastly, you can use the Project Bank Accounts. This enables a contractor to keep working on a project even when you do not have the money yet. Once you have opened the account with your account holder, they finance the whole project once they have a written agreement from you and your client.

The bottom line of this point is to ensure that your business is adequately financed for important projects. Most businesses need financing, especially when there are no slush funds to rely on. You should therefore make the most of the options available to better manage your cash flow.

  • Chase your payments

This is dirty work but it is an essential evil that every business has to deal with at one point or the other. Never be afraid to pick up the phone to ask for invoice payments, especially when it is a huge invoice. Be assertive and firm with your request too. Also, instead of receiving payments through checks, you can opt to get paid through direct debit or instant transfer. That way, there will be no excuse for checks getting lost in transit!

  • Don’t be afraid to cut obligate defaulters loose

If a customer is perpetually late in payment, it may be a good idea to let them go. If you think about how much you may be losing by not getting paid on time, you will realise that you are probably better off without them. When you think about it, that could even give your space to take on newer better paying clients.

  • Never let outstanding debts grow

It will be foolhardy to keep a supplier or a customer that has not paid outstanding debts. You are setting yourself up for bad debt in a big way. Rather, ensure they pay first before they can receive another supply. Otherwise, cut them loose early. It is better to lose small than loosing big!

  • Regularly update your cash flow chart

Oftentimes, working with projections from past glories may let you down. It is therefore important that you regularly update your cash flow so that you can keep up-to-date with current events. This is even more important when you consider that inflation rates keep fluctuating and they could affect your business.

  • Know when to lease or buy

As cool as owning assets sounds, it can be wise to just lease them for the time being, especially for small businesses. An example of such is opting for a virtual office address instead of obtaining an actual physical office in a prime location. That way, you save cash and it can be expended on another thing for your business. It is also a good way to reduce overhead costs, especially if your employees can then work remotely.

Another example is leasing a truck to transport your goods to your customers rather than actually owning one. If you do not make transports often, it may be a foolish expense for the business to own a truck when you can simply lease one whenever your goods are ready for transport.


Understanding and adequately managing your cash flow is important to keep you in business. No business can run smoothly on a deficit. You will therefore do your business a lot of good by knowing when to let loose in spending and when to cut your coat according to your size.

How to improve my cash flow?

It's easy:
HowTo step image

1. Know and manage your customers and suppliers

An initial background check for the creditworthiness of your customer will let you know if you should go into business with them or not. Also, never be afraid to ask for your payment if it is late in coming. You should also know when to cut lose a customer who is constantly defaulting in payment. Lastly, treat your suppliers with respect by informing them if a check will bounce before it does and asking for a period of grace.

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