Cash flow management: A practical guide for small businesses

Published Monday 2 February 2026

Table of contents

• What is cash flow management?
• How to track your cash flow
• Use financial planning and forecasting
• Chart your cash flow
• Make minor adjustments to regulate cash flow
• Review expenses regularly
• Chase the money you're owed
• Manage your business debt
• Be ambitious but stay realistic
• Put financial management at the heart of your business
• FAQs on cash flow management

Key takeaways

• Track your cash flow using accounting software to create real-time cash flow statements that show operating, investing, and financing activities, giving you clear visibility into where money comes from and goes.
• Maintain three to six months of operating expenses in cash reserves as a financial buffer, and conduct regular six-month forecasting to anticipate potential cash flow problems before they occur.
• Implement prompt invoice collection by using ageing summaries to identify slow-paying customers and chase overdue payments consistently, as delayed payments directly impact your available cash.
• Review your expenses regularly using profit and loss statements, balance sheets, and cash flow reports to identify cost-saving opportunities and prevent spending overruns that could damage your cash position.

What is cash flow management?

Cash flow management is the process of tracking, analysing, and optimising the money moving in and out of your business. It's about making sure you have enough cash to pay your expenses and invest in growth.

A positive cash flow means more money is coming in than going out, giving your business a healthy financial cushion. A negative cash flow means you're spending more than you're earning, so you need to act quickly to protect your business.

Why cash flow management matters

The first few years for any new business are crucial. Strong cash flow is a major factor in helping small businesses stay open and grow. By managing your cash flow carefully, you can spot potential shortfalls before they become a problem.

Good cash flow management helps you make better decisions, plan for the future, and run your business with confidence. It gives you the clarity to control spending and grow your business without taking unnecessary financial risks.

How to track your cash flow

The best way to track your cash flow is with a cash flow statement. This report shows you exactly where your money came from and where it went over a specific period.

Your cash flow is typically broken down into three areas:

• Operating activities: Cash generated from your main business activities, like sales and payments for expenses.
• Investing activities: Cash used to buy or sell long-term assets, like property or equipment.
• Financing activities: Cash from investors or banks, as well as payments made to owners.

Using accounting software can automate this process, giving you a real-time view of your cash position without the manual work. In fact, research from the ATO shows a 90 per cent correlation between small businesses calculating and paying tax correctly and their use of accounting software combined with professional advice.

Use financial planning and forecasting

Financial planning helps you allocate revenue across different business priorities. A common framework divides revenue into three categories:

• 50% for operating expenses: Payroll, supplies, and day-to-day costs
• 30% for business growth: Equipment expansion and recruiting
• 20% for future development: New products and services

Different plans work for different businesses, and you should discuss this with your accountant to see what works best for you.

But circumstances change. When they do, your financial plan should change too.

Try to conduct some simple forecasting of your business for at least the next six months. Be realistic and try to estimate how much you will sell and how much you will spend.

Plug these numbers into your financial plan and see if the results will still work for your business. If not, you may need to change your plan. You can also use a budget to structure your plan and set realistic boundaries.

Chart your cash flow

Cash flow charts show you exactly when money enters and leaves your business. Quality accounting software creates visual reports that track:

• Inflows: Sales revenue and other income
• Outflows: Bills, expenses, and payments
• Timing patterns: Weekly and monthly trends

Profitable cash flow requires inflows to exceed outflows consistently. The size of this difference determines your business stability.

Most businesses experience natural fluctuations:

• Strong periods: Higher sales and steady expenses
• Challenging periods: Lower revenue or unexpected costs
• Seasonal patterns: Predictable ups and downs

Is the difference between income and expenditure often small? Does it sometimes dip into negative territory? Those are periods when your business is more vulnerable to cash flow problems.

Try to find out what's causing this to happen at specific times. You can then restructure some aspects of your business to smooth out the dips.

Make minor adjustments to regulate cash flow

Maintain three to six months of operating expenses in cash reserves. This buffer protects your business during challenging periods. According to Australian Accounting Standards, these reserves should be held as cash equivalents that are readily convertible to cash with a short maturity, ensuring they are accessible when needed.

If cash flow problems occur at predictable times, try these adjustments:

• Negotiate payment terms: Align supplier payments with customer receipts
• Reduce payment terms: Encourage faster customer payments
• Optimise inventory: Reduce money tied up in unsold stock by using Xero inventory management
• Establish credit lines: Access short-term funding when needed

Review expenses regularly

Regular expense monitoring prevents cost overruns and identifies savings opportunities. Good accounting software like Xero Expenses will let you quickly draw up useful financial statements and reports.

Essential financial reports include:

• Profit and loss: Track income, expenses, and profits over time
• Balance sheet: Monitor assets, liabilities, and equity
• Cash flow statement: See money movement in and out of your business
• Accounts reports: Track money owed by and to your business
• Depreciation reports: Monitor asset values and tax deductions

Keep an eye on your payroll too, even if you outsource some of it. For a growing business, this is often more complex than anticipated.

Review all of these regularly, preferably with the help of your accountant or financial advisor, who can act as a sounding board.

Keep your personal and professional finances separate: use a separate credit card and bank account for business-related expenses. That makes it much easier to keep track of your business costs and also identify business tax write-offs.

Chase the money you're owed

Understand the importance of collecting money on time so that you don't leave cash on the table. Use your accounting software to draw up ageing summaries so you can quickly see who is taking the longest to pay. And then chase them, politely, and keep chasing them until they pay.

Make your invoice payment terms and the payment due date very clear, to avoid any confusion.

If you have a lot of invoices to chase, you might consider using a factoring agency. They can guarantee your invoice payments within a certain number of days by buying your accounts receivable ledger at a discount.

However, it could cost you a significant percentage of the invoice total, and some agencies exclude the chasing of bad debts. Still, in some circumstances such agencies could help stabilise your cash flow.

Manage your business debt

Debt is a fact of life for many businesses. It might be start-up funding, loans for capital equipment or commercial mortgage payments. Few businesses are entirely debt-free. And if the cost of the money you borrow is lower than the return generated by your business's use of that money, it makes sense to borrow.

It also makes sense to keep an eye on your borrowing costs. This is particularly true with variable rate loans, which can change due to any number of reasons, some of which might only be in the small print of the loan contract.

Assess your debts on a regular basis. Look at repayment costs, see whether your circumstances have changed, and decide whether you need to reduce or increase your debt funding.

And don't forget to shop around. Talk to your accountant to see if there are better ways for you to borrow. Shifting your debts to a different lender can sometimes save you a lot of money.

Be ambitious but stay realistic

Ambition and enthusiasm are important traits for business owners and managers. So is the ability to make rational financial decisions based on the facts.

When you start a new business the feeling of control can be exhilarating. Free from the constraints of employment, you can make any financial decision you want to. Some of those decisions will work well, and others will give you useful lessons for next time.

Successful entrepreneurs make recoverable mistakes and learn from them. The key is keeping mistakes small enough that they don't threaten your business survival.

This approach protects your cash flow while allowing room for calculated risks.

This pragmatic approach reflects how most large businesses grow. They expand over time, with occasional setbacks, by taking calculated risks rather than unnecessary ones.

Put financial management at the heart of your business

Managing your finances and cash flow shouldn't be an afterthought. It should be a fundamental part of your business strategy.

To be a successful entrepreneur you must thoroughly understand the numbers that drive your business. That will give you the knowledge you need to keep your business running, and help it to grow when the time is right.

Good accounting software will make it easy for you to plan, forecast, chart and chase your business's money. But even with that support, only you can steer your business in the right direction.

Find out more about how you can run your business when you try Xero for free.

FAQs on cash flow management

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

What are the principles of cash flow management?

The main principles are to monitor your cash inflows and outflows, speed up money coming in, manage when you pay bills, keep a cash reserve for unexpected costs, and regularly review your financial position.

What is the best way to manage cash flow?

The best way is to combine forecasting, prompt invoicing, smart expense control, and clear visibility of your cash position. This includes regular forecasting, prompt invoicing, managing expenses, and using online accounting software to get a clear, real-time view of your finances.

What are the main types of cash flow?

The three main types are cash flow from operating activities (your day-to-day business), investing activities (buying or selling assets), and financing activities (money from loans or investors).