5 Ways to Manage Cash Flow, Increase Profitability (2024)

You know how to cut costs and you know how to get paid faster, but what about cash flow?

It’s no secret that cash flow management is an unmitigated pain. It can challenge even the most seasoned entrepreneurs and business owners. So it’s a no brainer that understanding and controlling cash inflows and outflows ensures that a company remains financially healthy.

Cash flow complexity stems from the misconception that positive cash flow – when more money is coming in rather than leaving translates to profit. Extra money in the bank means that your company is flushed with cash, right?

Well, not always.

While there may be money in the bank, a certain amount of it is probably earmarked for operating expenses (i.e., payroll, rent, bills and more)—meaning that amount of money is not pure profit. If you fail to account for necessary payments the result can be a negative cash flow—when more money is leaving the organization than coming in.

Positive and negative cash flow will affect all businesses. There’s no avoiding it. However, there are ways that you can manage your cash flow in a way that can increase profitability.

How to manage cash flow

Here are the five steps small business owners can take to avoid cash flow problems and increase their bottom line.

1. Monitor your operating activities

Take a look at previous cash flow statements and understand your company’s financial performance. It’s the only way to create profit opportunities through cash flow. Take a trip down accounts payable (AP) and accounts receivable (AR) memory lane, and look for any repetitive cycles or common actions that affect cash flow. Were there times when there was a shortfall and less money came in? Are there significant, regular business expenses once or twice a year that you should account for? Do you have to hire more talent for certain times of the year, like holidays?

This knowledge enforces the “big picture” of cash flow. You’ll learn what to prepare for and what to expect through cash flow projections.

A simple, helpful solution is to adopt a heavyweight accounting software like Intuit QuickBooks Online or Xero. These solutions act as your financial dashboard, tracking everything from AP, AR, cash flow and more, and consolidate it into one platform. All the information you need is at your fingertips. With that kind of flexibility, there’s no excuse not to access your accounting solution every day and monitor your business’s cash flow and working capital regularly.

2. Budget for business operations

Budgeting—it seems simple. However, not all businesses create and deploy budgets for their expenditures. And others that do, might not follow them stringently.

Since monitoring has allowed you to understand the ebb and flow of your cash flow, set a business budget each year. It’s perfect for cash flow management and enables you to save money during those positive and negative times.

By understanding your business cash flow and anticipating business needs, you should know your cash position and whether or not you’ll have enough money and liquidity needed at a given time. Budgeting will help with your financial management to predict a need for another business credit card or business loan. You’ll be able to look at lenders’ interest rates and open new lines of credit in advance, before you don’t have enough cash.

3. Invoice on time

In order to bring money in, you’ve got to send out invoices regularly and on-time. With—you guessed it—a cloud-based solution! One that can help automate invoices and send them electronically. This will save you an inordinate amount of time. Imagine a life where you don’t spend your valuable time creating, mailing, receiving, and processing invoices. AR solutions, such as BILL, also include invoice templates to pick and use at your convenience.

4. Collect payment and reduce late payments from customers/clients

Your customer has the invoice, now what? How will they pay? Well, you can help with that. Make sure you accept multiple forms of payment—preferably online. You just saved time on invoices, you don’t want to wait for a paper check to be reviewed, approved, cut, signed, and mailed.

An online invoice gives your customers the option to pick their preferred payment form. Whether it’s PayPal, ACH, or credit card, they can submit their payment right away. If you can, offer your customers the ability to auto-pay to reduce poor cash flow from late payments. That way, whenever the payment is due, that money is easily collected and waiting in your bank account.

5. Offer discounts in payment terms

We all love a good discount. We know that the 20% off coupon from Bed Bath & Beyond sends a shiver down your spine. And the easiest way to encourage customers to pay sooner? Offer discounts to those that pay ahead of time, in bulk, or by a particular due date. But be cautious — if you offer early payment discounts too often or too deeply, this tactic may cause unwanted headaches with your profit margins.

Take these five steps and lean in towards automation, online payments, and successful cash flow management. Remember, increasing profitability isn’t a trend, it’s a strategy.