Dollar Bills in Hands Illustrates Cash Flow for Small Business

Why thinking about cash flow matters to small businesses

3 min read
Stephanie Dazey

If you’re a small business owner, you already know that money rarely stays in one place. Cash comes in through sales and goes out when you pay expenses. There’s a flow to it, and whether or not the term is part of your daily vocabulary, cash flow is king.

In an ideal scenario, your business would have more cash coming in than going out.

That would be considered a positive cash flow. In reality, though, bills tend to recur every month, employees continually need to be paid, and unexpected expenses crop up.

This is when having cash flow goes from a theoretical nice-to-have to a critical piece of your business’s financial jigsaw puzzle.

Related: Resources for Funding a Business

Overcoming cash flow challenges

Woman on Mountain Peak Symbolizes Overcoming Cash Flow Challenges

In fact, according to a recent survey conducted by Kabbage, 30% of small business owners cited cash flow as their biggest challenge in the first year. A lot of that is due to a lack of experience.

When you’re just starting out, it takes time to figure out how to manage your cash.

Unfortunately, poor cash management is one of the biggest reasons small businesses fail.

Cash flow affects every small business, but it can be especially tricky for labor-intensive industries like restaurants and construction. To be successful in those industries, the more in tune with your daily inflow and outflow, the better.

If you’re on top of what’s coming in and out, you put yourself in a better position to strategically find ways to minimize volatility.

Fewer than 50% of small business owners consider themselves generally knowledgeable about accounting and finance. If finance is not your area of expertise, finding innovative strategies to manage cash flow can involve a fair amount of trial and error.

For the small business owners who don’t feel comfortable with running their business finances, it’s not uncommon for those owners to rely heavily on outside accountants to handle their books. Many providers that work with small businesses have started offering cash flow consulting as a service.

Devising homegrown strategies like developing vendor relationships to gain more flexibility can also be helpful.

There’s nothing wrong with reaching out to professionals for a step up.

Related: Small business funding options

Pivoting for growth

Once small business owners master their cash flow, their attention usually turns to growth. This often means gaining access to additional capital.

In their study, Kabbage found that 20% of small business owners felt they would need more money to reach their long-term growth goals.

In the early years, traditional funding through banks can be hard to come by. Some turn to relatives or credit cards to get the cash they need.

In recent years, though, mobile lending platforms have gained popularity among small businesses in search of fast, flexible funding solutions.

After gaining access to additional working capital, the conversation shifts to figuring out the best way to spend it.

The most common uses that small business owners cite are purchasing new inventory, expanding their operations and hiring additional staff.

How funds are utilized varies greatly depending, but successful small business owners say that the ability to invest money back into their enterprise was a major factor in their success.

Learn more about managing cash flow for small businesses

If you’re ready to go deeper, read Kabbage’s Guide to Cash Flow Management for tips and insights on handling cash in, cash out and cash at rest.