When it comes to growing your business, cash is king. For small to midsize businesses (SMBs) in particular, maintaining positive cash flow is critical for creating short-term profits and long-term success. However, sustaining positive cash flow can be a challenge for smaller companies, especially when unexpected expenses, seasonal revenue swings, or unpaid invoices throw off your accounting. And, if the economy stumbles, companies with cash flow issues are more vulnerable to failure, making it essential for business owners to create a strong financial plan before a downturn occurs.

Thankfully, 74 percent of small business owners surveyed in the Fall 2019 Capital One Small Business Growth Index say they feel prepared for a recession from a cash flow perspective. But you can always do more to stay ahead of potential setbacks. Remember, even if a third party manages your accounting, you should clearly understand everything about your company’s finances. 

Get educated about your finances

Managing your cash flow starts by getting a full picture of your finances so you know where you stand and can better prepare for any future growth. To do this, look at your revenue and expenses over the last 12 months, and use a cash flow management tool to understand the details of how much money is coming in and going out each month. This process will highlight potential cash shortfalls that could arise. 

When building your cash flow model, make sure to record all recurring expenses, including rent, utilities, insurance, and payroll, but also note upcoming costs such as equipment purchases, new hires, or insurance premium increases. Also be sure to record any recent or upcoming changes to your business, such as lost clients, new clients, changes in sales volume, manufacturing issues, seasonal slowdowns, and others that could affect future revenue or costs. You should also note any outstanding invoices you have yet to pay, and conversely, any invoices you are owed. 

And remember, you don’t have to do this alone. Building a relationship with your banker or accountant can go a long way in keeping your business financially fit. These professionals can help maintain a forecast of expected cash inflows and outflows to avoid any surprises and revisit projections periodically for accuracy.

Be prepared for the unexpected

Once you understand your cash flow model, you can identify any changes you need to make to reduce expenses. It’s also important to do regular audits to see how your cash flow is changing and adjust as needed to bring your income and expenses back in line with your long-term model. But even the best cash flow plan can’t account for totally unexpected expenses, such as a large capital outlay to replace broken equipment or a sales downturn due to bad weather.

Having cash reserves can help in those unexpected situations. If you haven’t already started saving, you can start small by setting aside even 1 or 2 percent of your earnings. As your savings start to grow, you can slowly increase that percentage. You should also look to capitalize on business credit card rewards by using your card for payments you might not normally consider, like insurance. As you accumulate cash back rewards, you can save the money for a rainy day. Another option is to keep a line of credit. Even if you don’t need it now, a line of credit will ensure you have access to cash if an unexpected expense arises.

Keep money flowing in

One of the biggest challenges small to medium-sized businesses face in maintaining a steady cash flow is getting customers to pay on time. It’s hard to stick to a cash flow model when clients pay late. That’s why it’s critical to set up a foolproof system for sending invoices and tracking payments. Always invoice promptly and designate a payment window that makes sense for your company. Then, ensure your invoicing system sends automatic reminders when payments are due. 

If you're providing long-term services, consider a multiphase payment structure. For example, you can build an upfront deposit into your contract and require partial payments when specific milestones are met. You might also consider a discount for invoices paid within a short timeframe to incentivize prompt payment.

No matter what your invoicing structure, always take quick action to ensure prompt payment of late invoices. If you’re having trouble collecting, try calling your client instead of email. It goes without saying that you should make it as easy as possible for your customers to pay you. To ensure you can collect credit-card payments, incorporate smart terminals and mobile card readers into your physical stores and offer phone and online ordering.

Cut money flowing out

Once you’ve optimized incoming cash flow, make sure to trim outgoing expenses as much as possible. You should complete an audit at least once a year to identify unnecessary expenses and pinpoint where you could cut costs. Sometimes, you can save substantial amounts each month by changing providers or switching to a lower level of service. Ask yourself these questions each year: Which expenses are for services we no longer need? Which expenses could be replaced with cheaper or better options? Which debts could we pay off or refinance with more favorable terms? Should we replace equipment leases with outright purchases? Which new expenses or purchases would be worth it to fuel growth?

Generating the most revenue possible by offering amazing products and impeccable customer service is the best way to increase cash flow, but cutting unnecessary expenses is also important. More money in, less money out is the small business owner’s mantra.

Managing cash flow is an ongoing challenge for every small to medium-sized business. But if you stay informed about your finances, do regular expense audits, and collect all money owed to you, you’ll already be ahead of many competitors. Once you’ve mastered these basics, you can use cash flow management tools to generate even more revenue and fewer expenses. And, of course, make sure to work with small business banking experts who can help you reach your goals.