Cash flow management: A practical guide for small businesses

Published Friday 23 January 2026

Table of contents

• What is cash flow management?
• Types of cash flow you need to track
• Use financial planning and forecasting
• Chart your cash flow
• Manage your business debt
• Review expenses regularly
• Chase the money you're owed
• Put financial management at the heart of your business
• FAQs on cash flow management

Key takeaways

• Implement the 50/30/20 allocation rule by dedicating 50% of income to operating expenses, 30% to business growth, and 20% to future development while maintaining 3-6 months of operating expenses in cash reserves as a safety net.
• Create monthly cash flow forecasts that project six months ahead using realistic figures based on historical data, and update these forecasts every 30 days to identify potential shortfalls before they become problems.
• Accelerate cash collection by reducing invoice payment terms by 1-2 days, making payment due dates clear on invoices, and consistently chasing overdue payments using accounting software to track ageing summaries.
• Monitor all three types of cash flow regularly through automated accounting software that tracks operating cash flow from daily business activities, investing cash flow from asset purchases, and financing cash flow from loans and debt repayments.

What is cash flow management?

Cash flow management is the process of tracking the money moving in and out of your business. It helps you monitor your financial health in real time so you can make sure you have enough cash to pay your expenses and invest in growth.

By understanding your cash flow, you can spot potential shortfalls before they become a problem, giving you the confidence to plan for the future.

Why cash flow management is crucial for small businesses

Strong cash flow management is one of the biggest factors in helping small businesses stay trading beyond the first five years. Common cash flow mistakes include:

• Poor planning: Not forecasting cash needs for the next 3-6 months
• Unrealistic targets: Setting revenue goals without matching expense planning
• Cost blindness: Failing to track daily expenses and their impact
• Payment delays: Not chasing overdue invoices promptly is a common mistake, with the Federation of Small Businesses reporting that more than half of small businesses suffer from late payments.

You can maximise your chances of business success by being aware of the pitfalls. Then you can manage your finances carefully and keep a close eye on your cash flow.

Taking sensible, practical steps will help you control spending and grow your business without taking excessive financial risks. You can use the following practical steps to control spending and grow your business without taking excessive financial risks.

Types of cash flow you need to track

To get a clear picture of your finances, it helps to understand the different types of cash flow. They are usually broken down into three main categories.

• Operating cash flow: This is the cash generated from your main business activities, like sales of goods or services, minus your day-to-day operating expenses.
• Investing cash flow: This includes cash used to buy long-term assets like property or equipment, as well as cash received from selling them.
• Financing cash flow: This is the money moving between your business, its owners, and its creditors. It includes funds from loans or investors, as well as repayments of debt.

Use financial planning and forecasting

Financial planning involves creating a structured framework to allocate your business income effectively. A proven allocation model for small businesses follows the 50/30/20 rule:

• 50% for operating expenses: Payroll, supplies, rent, utilities
• 30% for business growth: Equipment, marketing, recruitment
• 20% for future development: New products, services, innovation

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

Cash flow forecasting helps you predict and prepare for financial changes. Create effective forecasts by following these steps:

1. Review monthly: Update your forecast every 30 days minimum
2. Project six months ahead: Estimate sales and expenses for the next half-year
3. Use realistic figures: Base projections on historical data, not wishful thinking
4. Test your plan: Check if projected results match your allocation model
5. Adjust when needed: Modify your plan when forecasts show potential problems

You can also use a budget to structure your plan and set realistic boundaries.

Calculating your cash flow from operations can help you get a sense of the cost and profitability of your normal business activities.

You can also use valuation methods like discounted cash flow to help decide which direction to take your business in based on projected returns. Calculating your quick ratio is another worthwhile exercise, as this will tell you how well you can cover your debts for the next three months.

Looking ahead at your cash position matters because, if there is serious doubt about whether your company can keep trading, auditors must flag this in their report.

You can read more about how this is treated in the UK in the government’s guidance on financial distress and going concern.

Chart your cash flow

Cash flow charts visualise money moving in and out of your business over time. Modern accounting software creates these charts automatically and helps you:

• Track inflows: Monitor sales revenue, invoice payments, and other income
• Monitor outflows: See expenses, supplier payments, and operating costs
• Adjust timeframes: View daily, weekly, monthly, or quarterly patterns
• Identify trends: Spot seasonal variations and cash flow cycles
• Make predictions: Use historical patterns to forecast future cash needs

You need your cash inflows to be higher than your outflows to make a profit, but the size of the gap really matters. It will vary over time because few businesses make a consistent profit every day. Some months or weeks will be strong, others quieter.

Looking at your charts helps you see how this pattern changes over time. You can read more about the difference between cash flow and profit to understand how both affect your business.

Is the difference between income and expenditure often small? Does it sometimes dip into negative territory? Those are periods when your business is potentially at risk of cash flow problems. Try to find out what's causing this to happen at specific times. You can then attempt to restructure some aspects of your business to avoid the dips.

Make minor adjustments to regulate cash flow

Cash reserves act as your business safety net during difficult periods. Aim to maintain 3–6 months of operating expenses in reserve. This aligns with best practices, as regulatory bodies note that many companies have improved how they report on financial health, having disclosed key liquidity information such as cash availability and undrawn borrowing facilities.

• Renegotiate payment terms: Align supplier payments with customer receipts
• Reduce invoice terms: Cut payment periods by 1–2 days to speed up collections
• Optimise inventory: Reduce stock levels to free up cash and storage costs
• Establish credit lines: Secure business credit before you need emergency funding

Be ambitious but stay realistic

Ambition and enthusiasm are important traits for business owners and managers, but so is the ability to make financial decisions based on facts. When you start a new business, the feeling of control can be exhilarating because you can make your own financial decisions. Some of those decisions will work well, and others will teach you what to change next time.

Like any other area of life, learning to run a business comes through experimentation, successes and occasional mistakes. The mistakes are important; if you read any successful entrepreneur's autobiography or biography, mistakes will feature highly.

But successful entrepreneurs have two things in common: they learn from their mistakes, and they keep those mistakes small enough that they can recover from them financially.

This is a pragmatic approach to doing business. Few large businesses became large overnight. They grew over a period of time, with setbacks along the way. Taking the occasional risk is part of good business. Taking unnecessarily big risks is not.

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. Get 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.

Review expenses regularly

Monitor your expenses by tracking all business spending so you can spot savings and protect your profits. Essential financial statements and reports include:

• Profit and loss reports: Track income, expenses, and profits over specific periods
• Balance sheet reports: Show your business assets, liabilities, and equity position
• Cash flow statements: Monitor money moving in and out of your business, as strong liquidity risk reporting is often linked to a company's viability and 'going concern' disclosures.
• Accounts receivable reports: Track money customers owe you
• Accounts payable reports: Monitor money you owe suppliers
• Depreciation reports: Calculate the declining value of business assets

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. For example, credit notes can be fiddly.

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

Remember to 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.

Adjust your margins and get your pricing right

What are the margins for the products or services you sell? This can be hard to quantify if you're in the service sector, unless you use sub-contractors to carry out the actual work for you. But it's easier for retailers. Some might simply apply a 50 percent mark-up to their cost prices, and sell an item for £30 that cost them £20 to buy.

Such basic pricing techniques are attractive for their simplicity, but there are often better alternatives. If you learn about price elasticity, or the price sensitivity of the things you sell, you can price your products or services more accurately.

For example, let's say you price an item at £50 and sell 80 of them in a week. If they cost you £20 each to buy, the £4,000 of revenue looks pretty good. But if you priced them at £30, would you sell 300 of them? Or if you priced them at £60, would you sell 70 of them?

There's no easy answer. It will depend on the desirability of the product, the location and visibility of your business, the effectiveness of your marketing and the pricing policies of your competitors.

What you can do is experiment. Test different pricing for a week or two, and keep track of how much inventory you manage to sell at each price point. Use good accounting software to compare the revenue and profit from differently-priced products over time.

Remember to take into account any seasonal variation, cost overheads and other factors. With some fine-tuning you should be able to get the maximum possible profit from the items you sell.

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 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 stabilize your cash flow.

Put financial management at the heart of your business

Financial management should sit at the centre of your business decisions so you can grow with confidence.

Strategic financial management means making cash flow monitoring central to your business decisions, not an afterthought. Understanding your financial numbers enables sustainable growth and prevents cash shortages.

Modern accounting software automates planning, forecasting, and payment tracking to save you time and improve accuracy. Try Xero for free to see how cloud-based tools can give you a clear, real-time view of your cash flow. With the right tools and knowledge, you'll make confident decisions that drive business success.

FAQs on cash flow management

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

What are the main objectives of cash flow management?

The primary goal is to make sure your business always has enough cash to meet its obligations, like paying staff and suppliers. Good management also helps you plan for future expenses, make smarter investment decisions, and maintain a healthy financial position.

What are some simple rules for good cash flow?

A few key practices can make a big difference. Try to get paid by customers as quickly as possible, manage your inventory to avoid tying up cash, and negotiate longer payment terms with your suppliers where you can. It's also wise to keep a cash reserve for unexpected costs.

How can software help with cash flow management?

Accounting software like Xero automates many of the tedious tasks involved in tracking your money. It gives you a real-time view of your cash position, helps you create forecasts, and makes it easier to send invoices and chase payments, all in one place.