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Cash flow management

James Huang | 2021.07.04

I had an interview earlier and talked about how to operate a company in successful manner.  I conclude as "It is all about cashflow".  (Back in 2020 July, we ran into cashflow issue due to over-ambitious on the market and rapid expansion.)

Monitoring cash flow is a core part of running a business. It’s not something you can afford to put on the backburner – but frankly, it can be a pain, distracting you from your real passion.  Cash flow doesn’t have to be tricky and understanding it is vital for the success of your business. Unsurprisingly, cash flow is a universal problem, with 61% of small businesses experiencing cash flow issues on a regular basis.

We’re going to walk through the most common causes of confusion for small businesses, starting with a common misunderstanding…

What is the difference between profit and cash flow?

You’re making a profit, but you have no cash. ‘What could be going on here?’ you think.

Imagine you’re a contractor and you do a $10,000 job. You’ve spent $4,000 on materials to complete the job. So, this month, despite completing the big job, you’ve spent $4,000 and not received any cash in.  But, your profit calculations count the invoice as income despite it not having been paid yet, so your profit for the month is $10,000-$4,000=$6,000. This will not reflect in your cash flow until the invoice is actually paid which in most cases, is likely to be the following month. Being able to account and run your business to this lag is vital.

The phrase “Turnover is Vanity, Profit is Sanity but Cash is Reality” springs to mind!

Cash is the amount of money a business has access to in real-time. This means money in hand, petty cash and the totals of any bank accounts. The net sum of your cash flow is the discrepancy between what’s coming in and what’s going out (again, remember this can be a negative value).

Profit is the financial gain (or loss) that comes from a business’s operations. Profit does not take into account whether a sale was made in cash or on credit. So, profit does not reflect the ‘real’ amount of money a business has. They’re still both important metrics, telling different stories.

Common cash flow problems SMEs face (and solutions (hopefully) below!) 

Stock control

Stock control, like so many things, is a careful balancing act.

Order too little stock and you won’t be able to fulfil demand or act on opportunities of increased demand. Order too much and you tie up cash flow in products that will give immediate returns and will cost you in storage charges, decreasing the amount of cash available for day-to-day operations.

Hefty payment terms

52% of B2B payments are still done by bank transfer which means that most small businesses rely on their customers to manually make payments within the agreed payment terms.

Lengthy payment terms will leave you waiting a long time for the financial return on your work. Whilst you wait for your clients to pay, unseen bumps in the road will be eating into any cash reserves you have. Similar to the example above, if you have a great June and pay for lots of materials, but don’t get paid for those jobs until August, you’ll need to use cash reserves to pay for the large amounts of resources, until the money comes in.

If the worst happens, say a large piece of equipment breaks, or you have a fire in a property, you might, despite being due payments, not have the cash around to fix it yet and will need to rely on your savings. Making sure you get paid as soon as possible after completing a job enables you to replace those reserves as quickly as possible.

Overspending and overtrading

It’s so easy to spend cash when you’re trying to grow your business. Facebook ads, SEO, websites, branding are all touted as the golden bullet to business growth. But don’t be tempted unless you have it planned

A budget that is feeding your cash flow will ensure that you know how much you have available to spend and if it is not in the budget, you must add it to see the impact on your cash flow before you buy it!

If you need to purchase materials before you get paid for fulfilling a job, you can end up spending more than you have in the bank, relying on overdrafts and loans. If your invoices, then, aren’t paid on time, you can end up in tricky situations where you’re having to scrounge for cash, or paying your expenses late


Seasonality has a huge effect on your cash flow, for the same reasons we’ve mentioned above. If you haven’t had much business through February and March, but know that April is your best month, buying materials, investing in marketing and making preparations for April means you’ll need to spend a lot before seeing any returns.

Additionally, if your business is reliant on particular seasons or periods in the year, working with a cash flow forecast allows you to ensure those good months help out the not so good, by helping you plan and budget your cash accordingly.

If you are building a cash flow forecast for the first time, it does not need to be difficult. Working with us based on your historic data can be done in 1 day workshop.

So, what can you do to improve your cash flow?

Your cash flow is crucial to keeping your business on the straight and narrow. There are lots of procedures that can be put in place to encourage best practices for your cash flow management.

Encouraging payment collection

Late payments are one of the biggest problems facing today’s small businesses. In a recent survey by PayPal, it was found that 48% of invoices were paid 14 days late, on average.

We can help you collect payments, as the invoicing tools they offer will help you send automatic reminder emails to your clients, and it also allows you to add additional methods of payment collection to your invoice such as getting your invoice paid via credit card with Stripe. 

Cut your costs

One benefit of building long-term cooperative relationships with your suppliers is being able to negotiate better deals with them, with reduced pricing or extended repayment periods. You will be a customer they will be relying on their cash flow for their next year and so may be willing to reduce costs in order to keep you.

Other general ways to reduce your costs include evaluating and reducing your expenses, innovating new ways to make the most of materials (using leftovers), consolidating your production/office space, reducing paid marketing spend (and investing in organic marketing instead), and going paperless.

Where to invest?

If your cash flow is a pinch point, consider the money you’re investing in the financing portion of your business. Are you reinvesting a lot? Are you trying to grow too fast, or at a bad time? Review the next 12 months as predicted in your cash flow forecast. Use data to drive decisions, not personal ambition (although a healthy portion of this goes a very long way too!).

Consider leasing at first, instead of buying

Equipment and machinery will often require massive upfront payments, as well as payments for the maintenance that comes with them. Especially in your early days, when upfront costs are high, one option to consider is leasing.

It does work out more expensive in the long run. So we wouldn’t recommend leasing everything you need. But it can be helpful for the equipment you won’t need for every job or those with the biggest price tags. It also means more predictable expenses – there will be no surprise maintenance costs with leased equipment.

Optimise your inventory

As we mentioned earlier, buying too much stock, or having excess stock on hand can be detrimental to your cash flow. By optimising your stock, you can ensure these issues are well avoided.

Stock optimisation is also called inventory optimisation. This is basically to make the stock as lean and beneficial as possible. This means that it will be optimisd in such a way so that it is the ideal size. Thus ensuring the supply needed for all purchases. You cannot do this without a solid cash flow forecast which has been built to account for the seasonality of your business and has accurate growth predictions.

Increase your prices

Increasing your prices can seem like a terrifying move to make, but it can work out. (We do it few times last year already) If your business is stable and you have regular customers, they’ll likely understand a slight price increase – there’s no way to know without trying.

Knowing the state of your cash flow is key 

Regardless of your business size, turnover or complexity – cash management must be your core priority. All decisions you make from hiring to product lines to pricing should be made against the cash flow forecast. Your cash position and projected cash position should be part of your monthly operational meetings with either your accountant or your team.

Cash flow management
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