15 ways to master cash management in business

15 ways to master cash management in business

Cash flow is the lifeblood of your business. Successful cash management in business not only increases the chances of your business succeeding, but also improves your productivity, reduces debt, and increases liquidity to fund future growth. The way you tackle cash management in business depends upon the individual circumstances of your company. Yet there are fundamental steps you can take to maximise your potential for lasting prosperity and stability.

What is cash management?

Cash management is concerned primarily with cash flow – the movement of money in and out of your business. Maintaining healthy cash flow is the most important factor in its continued success.

Cash management in business is a structured method of ensuring that sufficient cash is available to meet your current and future liabilities. It’s a balancing act between inflows and outflows (the cash flow cycle and your debtor to creditor ratio) that impacts multiple processes and stakeholders across the business.

It deals with the timing and balance of money changing hands, and whether it’s aligned in a way that means you can pay your expenses when you need to. Businesses fail when the demands for cash, from employees, suppliers etc arrive before cash is collected.

Why is cash management in Business important?

It doesn’t matter how compelling your product or proposition may be, the inflow of cash into your business is not inevitable. Whether it’s due to customers’ inability to pay invoices on time or a scarcity of available credit, your business can experience cash pressures from many sides. A business can run on a negative cash flow for a period of time, however, if a negative flow of cash is not managed and dealt with properly, it will result in a negative cash balance. The business will then not be able to pay its bills, and imminent failure is likely.

Cash is also necessary to fund growth, seize opportunities and maintain competitiveness. Tracking, monitoring, and managing your levels of cash skilfully and diligently is fundamental to a sustainable and prosperous business model.

There are many benefits to good cash management in business. With effective liquidity management, you will improve your cash flow, strengthen your balance sheets and reduce potential banking charges. Improving your overall awareness of your cash position will also help you plan ahead, reduce your overall exposure to financial risk and enhance your operational efficiency.

Running a well-managed, cash-healthy business will furthermore allow you to increase customer satisfaction, reduce customer churn and improve compliance with regulatory requirements, improving overall stakeholder confidence in your company.

Here are some steps you can take to improve the cash management in your business.

15 ways to master cash management in business

1. Streamline cash flow into your business

The most important factor when addressing cash management in business is the cycle of cash in and out of the company. Reducing your cash conversion period so that you can collect cash quicker will help you maximise your organisation’s cash flow position to meet your cash outflow obligations.

There are a few things you can do to speed up the flow of cash into your business:

  • Accept payment in as many forms, currencies and languages as possible
  • Credit check all new customers
  • Consider offering early payment discounts to customers to encourage swift settlement
  • Make sure your production processes, resources, shipping arrangements and inventory/service levels are capable of fulfilling orders
  • Send clear, accurate and correct invoices within 24 hours
  • Be polite but firm with payment and credit terms, and start your collection procedures as soon as the sale is made.
  • Encourage electronic payments wherever possible

2. Deal with late payments effectively

“Collecting debts is a competitive sport - If you’re not getting paid then someone else might be” - CIMA

Late payments are a continuing problem, with over one million SMEs across the UK experiencing slow or late payment. Delayed payments can quickly result in bad debt, which can spell disaster for small businesses. Be sure to analyse your payment data to prioritise your debt collection processes. If necessary, you may have to cease trading with continually late-paying customers, or at least move them onto a ‘cash only’ payment basis.

Other steps you can take include:

  • Performing initial credit checks
  • Making your payment and credit terms clear
  • Sending out invoices promptly and making them 100% accurate
  • Keeping a close monitor on payment due dates
  • Chasing invoices as soon as they become overdue
  • Having a formalised escalation and collection process that is made clear from the outset
  • In some cases getting 50% or even 100% of payment upfront

3. Optimise cash outflow for the good of your business

As well as improving the incoming cash, you need to make sure that your outgoings are timed for the optimum benefit of your business. If your cash levels create problems at specific times of the month or year, you should consider negotiating different payment dates with your suppliers to better align inflows with outflows. Spreading out your spend could give you a little extra breathing room.

4. Work out your break-even point

Your business cannot be consistently profitable unless you understand at what point it will break even. Calculate your break-even point along with your income, expenses, and taxes so that you can address unnecessary costs.

5. Don’t confuse profit and cash

Cash is the money actually received and spent in the process of doing business. Profit is the money made after all expenses are deducted from revenue. High profits for a particular month don’t necessarily mean that you have the cash in hand to pay other expenses when they’re due. Your sales may be healthy, but if your cash level is not, your business can be quickly exposed if only a few customers decide to pay their invoices later than usual.

6. Have a cash budget

A cash budget is an estimate of all cash receipts and expenditures expected to occur during a set time period. It provides a foundation upon which to work from. If something does go wrong, it can act as an anchor – helping you to keep sight of what was decided in the first place.

Keep it as simple as possible, and try to create two versions: one for when things go well, and one for when they don’t. A shorter-term budget, perhaps quarterly, will inevitably be more accurate and easier to create than an annual one. However, bear in mind that if your business is seasonal, then an annual budget may help you plan for the fluctuations that lie ahead.

7. Keep an effective and accurate forecast

Forecasting allows you to mitigate the impact of unexpected cash shortfalls, as well as prepare budgeting measures. Your forecast should include:

  • Cash receipts
  • Cash payments
  • Excess or shortfall of receipts over payments
  • Opening bank balance
  • Closing bank balance


Be sure to remember your tax and VAT obligations, and include key payment dates. If possible, factor in potential fluctuations in order volumes, terms and conditions. Don’t assume that receivables will continue to come in at a constant rate, that principle and loan interest rates won’t fluctuate, or that payables can be extended as far as they have previously.

Maintaining a solid and agile forecast will lead to better financial decision making, which will have a positive impact on your cash management.

8. Build up a cash reserve and use it wisely

If you have enough cash coming in after expenses to build up a cash reserve, be sure to put it to good use. This is a fundamental part of good cash management in business. Try paying your suppliers and other creditors early to build up a strong profile. Paying down your debt to reduce interest payments and improve your balance sheet is also a good idea. Or, if your business is experiencing strong growth, invest in product development and expansion.

9. Work out your debt priorities

One of the biggest concerns of liquidity management is paying creditors. As a rule of thumb, your employees and suppliers should come first. However, you won’t always be able to pay all your suppliers when necessary, so you need to decide which credit accounts should be paid first and which ones will have to wait. If you’re struggling to pay all your creditors, try to prioritise your debts as follows:

Priority – Debts too important to put off. For example, VAT, payroll or rent
Important – Supplier accounts you need to fulfil orders, utility bills and any other payments that are likely to impact your ability to trade
Flexible – Smaller creditors or those offering more generous credit terms

10. Apply for credit before you need it

Banks and other lenders are more willing to offer you a loan before you’re in need of one. Be sure to apply for additional working capital before your business is in dire need of it. The same can be said when your business is experiencing healthy growth. If you see the potential for significant growth in the near future, secure appropriate financing ahead of time to get you through any potential cash pinch due to increased production costs.

11. Open a revolving line of credit

Having long-term working capital finance such as a revolving line of credit will give you a buffer of available capital to use when needed. With a revolving credit facility such as Pay4, you can dip in and out of the facility, borrow, repay, and borrow again as needed. This means you can close gaps in working capital, seize opportunities, negotiate optimised supplier terms and offer competitive customer credit.

This flexibility allows you to invest in growth without placing your business under increased cash pressure. It’s a good idea to apply for a line of credit before you think you may be necessary. Because Pay4 has no non-utilisation fees, it can work as an emergency credit line to use as you please, aiding strong cash management in business.

12. Optimise your supply chain

A fundamental part of good cash management in business is ensuring that your outgoings are aligned to your business needs. This is where supplier relationships are important. Ordering regularly and paying on time can help ensure that you’re considered a preferred customer, which can bring extended terms and early payment discounts. This can positively help your cash situation. Having the ability to bridge gaps in your cash supply to pay early or on time and maintain strong and stable supplier relationships is key. This is where flexible financing such as Pay4 comes into its own.

If your business experiences seasonal variations in demand, arranging a payment plan with your suppliers that adjusts to your changing needs can help. If you need more days’ credit during the low season, discussing and arranging this with your suppliers can help the whole supply chain.

13. Eliminate bad cash management habits

Find what negative cash management habits your business is forming, such buying more inventory than you can sell or extending credit to habitually late-paying customers. Once you understand what those habits are within your business then you can eliminate them and improve your overall cash position.

14. Embrace technology

Almost two-thirds (63%) of small business owners say they would consider using new technology to help them manage their cash. New cloud-based cash management tools can integrate with your financial data to help you better understand your financials and spot cash management problems before it’s too late. Dashboards display clear financial information in the form of graphs and charts. To get a strong handle on your cash management in business, explore the range of technological advancements that can help you track key performance indicators, set goals and forecast. Do some research and read about the features that the various products have. Get a sense of what’s most appropriate for your business – both today and in the future, if your needs evolve.

15. Share your cash management plan with your team

Improve your liquidity management by getting your business into a financial rhythm with weekly, monthly and quarterly cash planning. Monthly KPIs and annual cash planning events can make stakeholders across the business more aware of the cash position. This will help limit unnecessary expenses. Keep your team informed about the cash position of the business, or you risk them mismanaging the cash you do have.

Successful cash management in business starts at the very beginning of the journey that cash takes into your business, and cycles through every part of your operations, informing forecasts, budgets, and future strategies.

Good cash management in business, therefore, requires a holistic view of the inflows and outflows of cash, as well as the nous to put cash to good use for the growth of the business. Planning ahead and gaining buy-in across the organisation and its supply chain is crucial. By taking our list of fundamental cash management in business steps into consideration, you’ll be able to put your firm on the path to prosperity.