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Feb 12, 2024 · 4 min read

Cash flow management strategies and tips for small businesses

Discover expert tips to optimize cash flow, from forecasting to budgeting. Explore Enty to streamline financial management.

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Managing cash flow is a crucial aspect of running a small business. It ensures that you have enough funds to cover daily expenses, pay suppliers, and even more - invest in growth opportunities. Effective cash flow management allows you to navigate financial challenges and maintain the long-term viability of your business. That’s why in this article, we will explore ten essential strategies to help you manage your cash flow effectively.

#1 Understand your cash flow

Cash flow refers to the movement of money in and out of your business. However, the subject is a little bit more nuanced than this and was covered in detail in our previous article. It is essential to remember that having a clear understanding of your cash flow allows you to make informed financial decisions. By monitoring the inflow and outflow of cash, you can identify trends, anticipate potential cash shortages or surpluses, and take appropriate actions to maintain a healthy balance.
To understand your cash flow, you can regularly review your financial statements, including your cash flow statement, income statement, and balance sheet. Analyze your revenue sources, expenses, accounts receivable, and accounts payable. These strategies will help you identify areas where you can improve your cash flow and make adjustments to optimize your financial stability, while Enty is happy to support all efforts with the Finances service. With our functionality, managing cashflow becomes a breeze - not only can you clearly see where your money is coming from and going to, but also set clear goals and see how the real picture compares to targets.

#2 Create a cash flow forecast

A cash flow forecast is a projection of your cash inflows and outflows over a specific period. It allows you to anticipate potential cash shortages or surpluses and make informed decisions. To create a cash flow forecast, estimate your expected revenue and expenses for the upcoming period - this can be done in just a few clicks with Enty’s Finance Service. Simply connect your bank account and voila - your dashboard is set up almost automatically. You can then adjust the desired period and choose specific bank accounts.
Don’t forget to consider factors like seasonal fluctuations, industry-specific trends, and changes in customer behavior. Use historical data, market research, and industry benchmarks to make accurate projections. Regularly update and revise your forecast based on actual performance to ensure its accuracy - this way, it will be a practical tool rather than a static metric.

#3 Implement effective budgeting practices

Budgeting is a critical component of cash flow management. It helps you allocate your resources wisely and ensures that you have enough funds for your business operations. Develop a comprehensive budget that includes all necessary expenses, such as rent, utilities, salaries, inventory, and marketing.
Regularly monitor your budget and compare it to your actual expenses. Identify areas where you can reduce costs without sacrificing quality or productivity. Look for opportunities to negotiate better pricing with suppliers, streamline your processes, and optimize your inventory management - by the way, Enty is a great way of managing back office processes too.
By implementing effective budgeting practices, you can control your expenses, maintain a healthy cash flow, and make data-driven decisions to grow your business.

#4 Accelerate inflows of cash

To improve your cash flow, focus on accelerating the inflows of cash into your business. Implement strategies to encourage customers to pay faster, such as offering discounts for early payments or implementing an efficient invoicing process.
Consider using technology solutions like Enty to streamline your payment processes and ensure timely collections - this can be accomplished with the ability to send payment links, reminders and even recurring billing systems. By reducing the time it takes to receive payment, you can improve your cash flow and maintain a healthy financial position.

#5 Negotiate favorable payment terms with suppliers

Negotiating favorable payment terms with your suppliers is another way to significantly impact your cash flow. Request extended payment deadlines to align with your inflows, which you have already learnt how to see with Enty. This will give you more time to generate revenue, manage the finances more effectively, as well as to maintain a positive working capital.
Additionally, explore opportunities to consolidate your purchases with fewer suppliers. Consolidation can streamline your operations, reduce administrative costs, and give you more leverage to negotiate better terms. Building strong relationships with your suppliers can also increase the likelihood of flexible payment arrangements during cash flow challenges.

#6 Manage expenses effectively

Managing your expenses is vital for maintaining a healthy cash flow. Regularly review your expenses and identify areas where you can reduce costs without compromising the quality of your products or services. Look for opportunities to renegotiate contracts, find more cost-effective suppliers, or implement energy-saving measures.
Optimize your inventory management to avoid overstocking and potential waste. Analyze your operating expenses and identify ways to streamline back-office processes for greater efficiency.

#7 Set aside funds for taxes

Of course, nobody likes taxes. But the key to staying on top of them lies in planning for them in advance. Set aside a portion of your income each month to cover your tax obligations. Consult with a tax professional to determine the appropriate amount to save based on your business structure and tax requirements, and don’t forget to check on the rules regularly.
By saving for taxes ahead of time, you can accurately plan your cash flow and avoid the stress of scrambling to cover your tax bill. Keeping your tax funds separate from your operating funds ensures that you have the necessary funds available when it's time to pay your taxes.

#8 Establish a cash reserve

This might sound over cautious, but having a cash reserve is essential for managing unexpected expenses and maintaining a healthy cash flow. Aim to build a reserve that can cover at least three to six months of your business expenses. This reserve provides a safety net during lean periods or emergencies.
To establish a cash reserve, set aside a portion of your profits each month. Treat it as a non-negotiable expense and prioritize building your reserve. Having a cash reserve gives you peace of mind and financial stability, allowing you to navigate challenges with confidence.

#9 Monitor and review your cash flow regularly

Consistently monitor and review your cash flow to stay informed about your financial health. Analyze your cash flow statements, compare them to your forecasts, and identify any variances. Look for trends, patterns, or areas of concern that require attention.
By reviewing your cash flow regularly, you can address potential issues proactively and make necessary adjustments to optimize your cash flow. This practice helps you stay in control of your finances and keep your business growing sustainably.

#10 Seek professional guidance

Managing cash flow effectively can be challenging, especially for small business owners and self-employed professionals. It could indeed be so sometimes, especially if you’re new to the subject and don’t know where to start. A financial advisor can help you develop a customized cash flow management strategy based on your specific business needs. They can provide valuable insights, offer solutions to optimize your cash flow, and help you navigate financial challenges.
However, this approach is not for everybody, as it can be expensive and time-consuming. The good news is that similar functions can be accomplished with modern tools - Enty is a great way to keep your finances in order without spending too much time, for just €14 a month.
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Last thoughts

Managing cash flow is a critical aspect of running a successful small business. By implementing the strategies outlined above, you can maintain a healthy financial position, and ensure the long-term viability of your business. But the process is an ongoing task that requires constant attention and new approaches. Therefore, implementing automation like Enty can give business owners a piece of mind and forget about the finances bureaucracy.
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