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How to Manage Cash Flow: 5 Tips for Your Small Business

By Eastern Bank’s Business Banking Team, Feb. 27, 2024
A woman sits at a desk in her workshop and reviews finances on her phone and business documents

Managing cash flow is critical to the financial health of your business. Read about effective strategies in this blog.

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Understanding how to manage cash flow is critical to maintaining your business's financial health.

Here are five strategies for effectively managing your company's cash flow, potentially helping you to weather financial storms and maximize revenue and profitability.


1. Negotiate Strategic Payment Terms With Your Suppliers


You likely work with suppliers who provide materials and services for your small business. One way to better manage your cash flow is to negotiate better payment terms with them.

If you have a strong and positive relationship with your suppliers or bring them a lot of business, you could ask for more flexible or favorable payment terms. This could include getting discounts for early payments, paying them 60 days rather than 30 days after they invoice, or paying at the end of the month to help space out your company's other payments and expenses.

Go into these conversations thinking about how changes could benefit both your business and the supplier. Once you reach an agreement, get everything in writing so the terms and conditions are clear.


2. Manage Receivables


Staying on top of your receivables, or income that comes into your business, is another effective approach for managing cash flow.

You can use several tools and tactics, like Monit™, to better manage receivables. For instance, automated software can help you track when to send invoices (and to whom) and ensure you send them early to minimize the chance of payment delays. There are many options that are simple to implement to help you get set up. Offering electronic payment options can also make it easier for customers to pay you on time. You could even consider offering a modest discount when customers pay by cash or check instead of credit card.

Establishing and enforcing stricter billing policies — such as charging late fees once a customer is 15 or 30 days past due — can also help you better predict when you'll receive money from those with outstanding payments due to you. Waiting on payments can make it difficult to fund your operations or invest for the long term.


3. Establish a Line of Credit


At some point, your small business may face a cash crunch and need to raise capital or borrow money. This is when it's valuable to have easy access to credit.

If you have a solid credit history and a great relationship with your primary banking provider, you may be able to establish a line of credit to better prepare for financial challenges. A line of credit is essentially a loan you can borrow from, up to certain limits, to fund various business activities. You only pay interest on the amount you borrow. For example, your bank may approve you for a $30,000 line of credit, but you may only draw $12,000 from it, which you'd have to pay back with interest.

It's best to establish these options when your business finances are in good shape, rather than waiting until you need the money. Proactive planning can give your company more financial flexibility and help you better manage your cash flow, especially when unexpected expenses or external events disrupt your normal operations.


4. Conduct Cash Flow Forecasting


Overly optimistic cash flow projections can hurt your small business, which is why it's important to conduct detailed cash flow forecasts. A cash flow forecast or projection allows you to estimate cash coming into and leaving your business based on your business's history.

You've likely had times when your company's revenue trended lower or expenses were higher, such as when quarterly tax payments were due. Use this information to prepare a detailed, realistic forecast that allows you to better predict and plan for potential shortfalls. When you know what times of year money might be tight, you can prepare for those events and reduce the overall impact on your organization's finances.


5. Build a Business Emergency Fund


While running your company, you've likely learned the importance of preparing for the unexpected. Every day could bring something new, for better or for worse. That's part of what makes running your own small business exciting. If you have a good month, quarter or even year in business, make it a habit to set aside a certain percentage of your profits to build your cash reserves. Think of this as your company's emergency fund.

Capitalizing on a surplus when business is booming can help you maintain stable cash flow when it isn't. For instance, no one could have predicted the supply chain disruptions, shifts in consumer behavior or changes in the economy seen since the start of the pandemic. However, businesses that were more financially prepared were generally able to navigate the disruptions better than their counterparts.

Improving Cash Flow Management

Figuring out how to manage cash flow can help put you in a better position to maintain and grow your small business. Whether it's negotiating with vendors, using automated invoicing tools or creating detailed cash flow forecasts, you can improve your company's financial position in several ways. As you add to your toolbox and best navigate cash flow as a small business owner, you can create a more resilient and successful company.

For more insights on how effective cash flow management works and why it’s worth your time, download a whitepaper here.


Speak with a banker today about cash flow management strategies and solutions.


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