Strategies for Managing Business Cash Flow

A female employee with short black hair smiles as she accepts payment from a customer in a brightly lit coffee shop.

The key to success for small businesses isn’t sales or revenue — it’s cash flow. That’s what keeps the lights on and the product line running while you’re waiting for invoices to be paid. Delays in payment can affect your cash flow and your ability to keep running your business.


What is Cash Flow and How Does it Impact Productivity?

According to the Corporate Financial Institute, cash flow is the increase or decrease in the amount of available cash a company has during a given time period, usually a month. (That’s also why most invoices stipulate a ‘net 30 days’ for payment.)

There are four main types of cash flow:

  • Cash from Operating Activities: cash that comes from a company’s core activities, not from its investments.
  • Free Cash Flow to Equity (FCFE): cash that becomes available after reinvestments have been made back into the business.
  • Free Cash Flow to the Firm (FCFF): cash that’s readily available and isn’t tied up in some other way such as leveraging debt payments.
  • Net Change in Cash: a fancy way of describing the change in the amount of cash that flows in the company from one accounting period to the next.


Cash Flow vs. Income

Income is the profit earned over a period of time; cash flow is the money circulating through the company on a day-to-day basis.

So what does all of this have to do with the health of your company? Gaps in your cash flow can lead to delays in production, an inability to innovate and the necessity of taking on debt which could hurt and even close your business.

But there are ways to manage your cash flow proactively, so that late payments don’t lead to a crisis.

Three Steps to Manage Cash Flow with Tools:

1. Planning - Failing to plan is planning to fail, so one of the best ways to plan your cash flow is to plan your business. Work with your business experts on yearly forecasting and updating the forecast on a quarterly basis, as circumstances or costs change. This includes keeping track of your clients, new leads, prices on your items, and vendor supplies, as well as internal costs such as rent and payroll. Keeping track of these costs can help you adjust prices based on the market, or even carve out a new business vertical to drive new revenue.

2. Invoicing - One of the more insidious ways of ruining your cash flow is to let those invoices disappear into the ether instead of enforcing payment. Instead of waiting for invoices to arrive in your bank account, and scrambling to find the money to pay your bills, take the time to shorten the invoicing process by creating electronic payment options for your clients. Fifth Third offers Biller Direct, which lets businesses accept payments online, by phone or by mobile service. That means you can receive your money much faster and directed to your accounts. Another option is ACH Receivables, which converts checks into electronic funds transfers.

You can also offer incentives to customers who pay early. Finally, consider changing the invoicing process and issue invoices after every transaction versus invoicing everyone at the end of the month.

3. Income Management - Planning your business and changing your invoicing system will certainly improve cash flow, but you also need tools that can help you bridge the drier monetary periods. One option is currency processing solutions. This where you invest in a business credit card (with rewards) or a line of credit with a low interest rate as a backstop between invoice payments. Fifth Third Bank's Zero Balance Accounts can help your business keep track of your invoices and reduce excess balances.

Preparing Leads and Growing Success

Running a business is tough, with many daily decisions to be made. Taking the time to plan your business and manage your cash flow gives you the opportunity to be proactive about your company’s finances. With a plan in place, you can spend more time growing your business instead of chasing your invoices.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.