Managing cash flow: Simple rules for small business success

Published Monday 26 January 2026

Table of contents

• What is cash flow management?
• Create a cash flow forecast
• Five rules for managing your cash flow
• Monitor your cash flow regularly
• Take control of your cash flow with the right tools
• FAQs on managing cash flow

Key takeaways

• Create a cash flow forecast that predicts your financial position for the next three months by listing all expected income and expenses, giving you clear visibility to anticipate cash surpluses or shortages before they become problems.
• Maintain accurate bookkeeping with weekly record updates and monthly financial report reviews to provide real-time visibility into your cash position and enable informed decision-making.
• Separate your business and personal finances completely to track actual business profitability without personal expenses clouding your view, as mixed finances make it difficult to assess true company performance.
• Build a cash reserve covering three to six months of operating expenses to protect your business from unexpected costs and enable you to seize growth opportunities without emergency borrowing.

What is cash flow management?

Cash flow is the money moving in and out of your business. Managing it means you always have enough cash to pay your expenses, like rent and payroll, on time.

Good cash flow management helps you spot potential shortfalls before they become a problem, giving you the confidence to plan for growth.

Create a cash flow forecast

A cash flow forecast predicts your future financial position. It helps you anticipate cash surpluses or shortages so you can make informed decisions.

Start by listing all your expected income and expenses for a set period, like the next three months. This gives you a clear picture of where your business is heading financially.

You can learn more in Xero’s cash flow forecasting guide.

Five rules for managing your cash flow

Effective cash flow management requires both generating revenue and collecting it efficiently. These five rules help you achieve both goals:

1. Keep your books accurate and up to date

Accurate bookkeeping provides real-time visibility into your cash position. Regular updates help you make informed decisions and spot problems early.

Essential bookkeeping practices:

• Update records weekly to maintain accuracy
• Use cash flow forecasting templates to predict future positions
• Review financial reports monthly to identify trends

2. Set clear payment expectations with your customers

Firm but fair collection practices protect your cash flow without damaging customer relationships.

Collection strategies:

• Monitor accounts receivable weekly to spot payment delays early
• Follow up within 7 days of overdue invoices
• Escalate collection efforts as invoices age beyond 30 days
• Take formal action when necessary to protect your business

3. Keep your accounting simple

Simple accounting systems give you instant access to your cash position and future projections. This visibility helps you make confident business decisions.

Key accounting practices:

• Use cloud-based analytics in your accounting software for real-time cash flow tracking
• Hire professional help if numbers aren't your strength
• Forecast working capital needs before accepting large orders
• Plan for growth expenses like expanded payroll and inventory

Why forecasting matters: Many businesses miss opportunities because they lack the cash to fulfil large orders. Proper planning prevents this.

What's more, a reliable accounting system will help you track and report on key business metrics. These include accounts receivable ageing, operating margins and inventory turnover.

Using a cash flow statement template can help you keep a clear record of your cash movements. You can also check out this example cash flow statement to see how it should be structured.

Having a good handle on these business metrics will help you manage your cash like a pro and take advantage of new opportunities.

4. Keep your business and your personal finances separate

Separate business and personal finances provides clear visibility into your company's true cash generation. Mixed finances make it hard to track business performance accurately, and according to the Australian Securities and Investments Commission (ASIC), poor financial control was a cause of failure for 36 per cent of companies in 2023–24.

Benefits of separation:

• Track actual business profitability without personal expenses
• Make informed growth decisions based on real cash flow
• Pay yourself appropriately from genuine business profits
• Build business reserves using excess company cash

5. Build a cash reserve

Cash reserves protect your business from unexpected expenses and enable you to seize growth opportunities. Most small businesses should maintain 3–6 months of operating expenses in reserve.

Building your cash reserve:

• Start with 1 month's expenses as your initial target
• Gradually increase to 3–6 months of operating costs
• Analyse cash flow patterns using examples to identify seasonal gaps
• Reduce owner drawings temporarily to build reserves faster

Benefits of cash reserves:

• Weather economic downturns without emergency borrowing
• Take advantage of opportunities like bulk purchasing or expansion
• Maintain operations during slow periods or client delays
• Negotiate from strength with suppliers and lenders

Monitor your cash flow regularly

Managing cash flow isn't a one-time task. Make it a habit to review your cash position weekly or monthly. Using accounting software can automate this process, providing real-time dashboards and reports. Regular monitoring helps you stay on track and react quickly to any changes.

Take control of your cash flow with the right tools

Effective cash flow management combines smart financial practices with the right tools to automate and streamline your processes.

Modern payment solutions like Xero Tap to Pay help you get paid faster by accepting contactless payments on the spot. This reduces the gap between delivering services and receiving payment.

Ready to take control of your cash flow? Try Xero for free and see how cloud-based accounting can make managing your finances easier.

FAQs on managing cash flow

Here are answers to some common questions about managing cash flow.

What is the main objective of managing cash flow?

The main goal is to ensure you have enough cash on hand to meet your short-term obligations, like paying bills and staff, without interruption. It's about balancing the money coming in with the money going out to maintain financial stability.

What are the four types of cash flows?

Cash flow is typically categorised into four areas: operating activities (from your main business operations), investing activities (from buying or selling assets), financing activities (from debt, equity or dividends), and other activities.

Research from the Australian Accounting Standards Board found that almost 98 per cent of top Australian companies classified most dividend-related cash flows within financing activities. For most small businesses, focusing on operating cash flow is key.

How far ahead should I forecast my cash flow?

A good starting point for a small business is to forecast 90 days ahead. This provides a clear short-term view to manage day-to-day finances. As you get more comfortable, you can extend this to a 12-month forecast for longer-term strategic planning.

What's a healthy cash reserve for small businesses?

A common guideline is to have a cash reserve that can cover three to six months of operating expenses. This provides a safety net for unexpected costs or slow periods, giving you peace of mind and flexibility.

When should I consider cash flow financing?

Consider cash flow financing when you face a temporary cash shortfall but have strong, predictable future revenue. It can help bridge gaps, such as waiting for customer payments or investing in a large order. It works as a short-term solution, so you still need to address any ongoing profitability issues.