What is Cash Flow Management?

Understanding how to manage income and expenses when running a small business may seem simple. But what happens if a big expense comes in while you’re still waiting for a customer to pay an invoice? This is why it’s important to understand cash flow management. Knowing exactly when money is coming into your bank account and where your money is being spent is an important part of financial planning. Cash flow management can be a useful skill not just for your business, but for your everyday life as well.

Let’s look at some of the best practices for cash flow management and discover how you can organize the money coming in and out of your accounts.

The basics of cash flow management

Cash flow management refers to the practice of managing the cash you’re bringing in, known as your cash inflow, and the cash that’s leaving your accounts, known as your cash outflow. If you’re bringing in more cash than you’re spending, you’ve got a positive cash flow. There are 3 main types of cash flow:

• Operating cash flow: Cash flow related to the everyday operations of your business. This can include sales, operational expenses and supplier payments.
• Investing cash flow: Longer-term cash flow that may change slowly over months or years. This can refer to investments in stocks and bonds, high yield savings accounts, company investments in research and development and other capital expenditures.
  
• Financing cash flow: Money coming in from investors or small business loans, along with the money you pay back in interest.

Cash flow is calculated differently from a business’ total profit or loss. For example, seasonal businesses like a ski resort or a seaside ice cream shop may have positive cash flow during the busy tourist seasons but bring in far less during the off months. This is why it’s important to stay on top of your cash flow management to help ensure you always have enough cash on hand to cover expenses and prepare for circumstances outside of your control.

What is a cash management account?

If keeping track of your cash flow across multiple accounts feels overwhelming, you might consider opening a cash management account (CMA). This type of account combines the features of a checking and savings account. It can also help your cash flow management by centralizing all of your funds into a single account without having to give up the benefits of a regular checking or savings account. Then, you can use your money to make regular payments while also receiving regular interest payments on your balance.

Why does my small business need cash flow management?

Tracking your cash inflow and outflow is important to understanding the financial health of your small business. Cash flow management can help ensure you have enough cash on hand to cover both your day-to-day expenses and any unexpected costs that may come up, like repairs or price increases from suppliers. You may need to hire seasonal employees or pay utility or tax bills even if your business is closed during the off-season. Having a positive cash flow, meaning you’re taking in more money than you're spending, may also enable you to consider making plans to expand the business or invest funds into new products or services.

Best practices for managing cash flow in small business

To take advantage of a positive cash flow, make sure your business is managing cash effectively. Some great first steps for managing your cash flow are:

Use digital tools to track your cash flow

Adopting software that tracks your spending and automatically creates cash flow reports may help you gain a deeper understanding of where your money is going and alert you to cash flow issues ahead of time. Some options include digital dashboards, accounting software and receipt management tools. Your bank may offer some of these services, or you may want to consider purchasing personalized programs or subscriptions.

Negotiate payment terms with your vendors

If you’re running low on cash, consider contacting your suppliers and vendors to see if you can get a discount. If you’ve been paying your invoices on time, they may cut you a little slack during the next pay period or offer you a loyal customer discount.

Keep a cash reserve for emergencies

Having some cash set aside can help if a large expense unexpectedly occurs. Keep this emergency fund in a separate account so you don’t feel the urge to use it unless it’s necessary.

Triple-check all payments

Keep an eye on any payments your business sends out, especially if they’re automatic. You may miss extra fees or fraudulent charges that can drain your bank account.

Everyday cash flow management

These cash flow management principles aren’t just useful if you run a business. Understanding your cash flow can also help your personal finances. This includes:

• Keeping track of your accounts: Consider putting some of your paycheck into a savings account automatically to build up an emergency fund.
• Know your regular expenses: Keep track of payments you make regularly. This includes not only rent, utility bills or prescriptions but also streaming subscriptions, in-app payments and charitable donations.
• Use a budgeting app: Connect a budgeting app to your bank account to see your payments divided into categories, helping you know where you might need to save more.
• Break up your personal and business accounts: Keep your business and personal income separate so you don’t end up spending money reserved for another purpose.

Manage your cash flow without stress

Cash flow management is an important part of any financial plan. No one likes to check their bank account and see less money than they expected. Simple reporting software, payment tracking and staying informed can help you understand your cash inflows and outflows and set your business up for financial success.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.