Unpredictability is becoming the new normal. Persistent inflation, shifting consumer demand and global trade friction are creating serious pressure on small and midsize businesses (SMBs), and that pressure is directly affecting cash flows.
According to research from Agicap, the average mid-size business now experiences an unexpected cash shortfall of more than $50,000 every 20 days.
But market conditions will always shift. Ultimately, it’s how you manage your cash flow that determines your long-term success. Let’s explore how you can spot weaknesses in your current system, apply short-term fixes when needed, and build a sustainable long-term strategy.
First, it’s important to understand the basics of cash flow management.
What Is Cash Flow Management?
Cash flow management is the process of tracking, analyzing and optimizing the movement of money in and out of your business. Done well, it helps ensure you have enough liquidity to handle daily operations, weather unexpected disruptions and invest in growth without relying too heavily on debt.
It’s important to distinguish net cash flows from net earnings because a business can show a profit on paper and still struggle to pay its bills. Your cash flow depends not just on how much revenue you generate and how much you spend, but also on when you collect your earnings and pay outstanding bills.
Cash Flow Is Crucial to Your Company’s Survival
Cash flow management is more than just a finance function, especially for SMBs. It’s also a critical survival tool. Running out of cash is one of the leading reasons for startup failure, contributing to roughly 38% of closures.
In periods of economic uncertainty, liquidity risk becomes even more significant. Your cash reserves and credit lines may not be enough to survive the volatility, making efficient cash flow systems and proactive planning increasingly essential.
Signs You Have a Cash Flow Problem
Poor cash flow management often manifests in relatively subtle ways at first, but by the time you have full-blown cash flow problems, it may be too late. Here are some common early warning signs to help you recognize weaknesses in your current cash flow management:
- Frequent late payments: You’re consistently paying your vendors late or struggling to make payroll because your cash reserves are stretched too thin. That can damage supplier relationships and employee morale.
- Overreliance on debt: You routinely carry over a balance on company credit cards, accruing finance charges on day-to-day expenses and steadily accumulating debt. Not only is this expensive in the short term, but it can also become an existential threat to your business.
- Rising accounts receivable (AR): Your AR may grow due to late-paying customers rather than increased sales. Even with strong revenues, you may struggle to cover expenses because it takes too long to collect.
- Limited cash flow visibility: You don’t have a clear picture of your cash position next week or month. Without regular forecasting, your operation’s stability is vulnerable to unexpected expenses or delayed payments.
If any of these issues sound familiar, it may be time to reevaluate your approach to cash flow management. Fortunately, they’re nothing you can’t overcome with the right adjustments to your systems.
How To Manage Cash Flow
If you’ve recognized that you need to improve your cash flow management but don’t know where to start, here are some of the most impactful practices you can incorporate to strengthen your system:
- Forecast frequently and update often: A rolling cash flow forecast—ideally updated weekly—is one of the most powerful tools for preventing potential shortfalls. It gives you visibility into what’s coming next and helps you make proactive rather than reactive decisions.
- Prioritize matching inflows and outflows: Cash flow isn’t just about how much money moves through your business, it’s also about when. Build your AR and accounts payable (AP) policies to align incoming and outgoing payments tied to the same project. For example, aim to issue vendor payments as close as possible to when you collect from customers for the same work.
- Keep working capital lean but protected: Avoid tying up too much of your cash reserves in places that don’t support your near-term operations. You want a big enough buffer to handle surprises but not one so big that it harms your company’s growth.
- Plan for the worst, even in good times: Scenario planning—mapping out best-case, base-case, and worst-case outcomes—helps you develop strategies for a range of potential situations, minimizing the impact of uncertainty.
Paro fractional CFO Brooke S. emphasizes the importance of scenario planning for informed decision-making:
“In taking the extremes to model out the worst case scenario and then dialing that back for medium and best case, the CEO and decision makers have some sort of banded decision-making of what they can look at depending on where they fall, like impact or how aggressive or conservative they want to be in their approach,” said Brooke.
The Importance of Cash Flow Forecasting
If you only make one improvement to your cash flow management, focus on enhancing your forecasting. A rolling 13-week cash flow forecast is one of the most beneficial tools in your arsenal. It provides a forward-looking estimate of your cash position over the next quarter and helps you make better-informed decisions week by week.
At its core, building a 13-week forecast involves:
- Mapping out expected cash inflows and outflows over the next 13 weeks
- Updating your estimates weekly so you’re always looking three months ahead based on the most recent data
This kind of forecasting is especially beneficial amid economic volatility, allowing you to plan proactively rather than react under unpredictable pressures.
For example, if your forecast shows a potential cash shortfall five weeks out if you were to have a delayed client payment, you might negotiate new payment terms with a vendor, freeing yourself to delay certain expenses and make up the difference.
Fortunately, you don’t need expensive cash flow management software to get started, as a simple spreadsheet can work well for many small businesses. However, you may want to consider tools with automated forecasting features once your needs become more complex.
Whatever method you use, consistency is key. Review and update your rolling forecast weekly to keep it up-to-date and ensure it continues to contribute to your cash flow management system.
“Strategic vision is the anchor that guides you,” said Brooke. “Make sure projections and forecasts together support where the CEO is going.”
Short-Term Cash Flow Management Strategies
Here are some tactics you can use to free up additional cash. While they aren’t a replacement for a sustainable long-term strategy, they can help you navigate a rough patch, pivot quickly, or buy time to make more permanent structural changes.
Renegotiate Payment Terms
If your vendors or suppliers offer net-30 terms, ask if they’d be open to net-45 or net-60 instead. Extending your payment window—even temporarily—can help you better match cash outflows with inflows. Many vendors are open to renegotiating, especially if you have a good payment history or are willing to set up autopay in return.
Strategically Revise Your Budget
Identify discretionary expenses you can pause or reduce without impacting operations. For example, this might involve delaying a planned marketing push or scaling back on travel expenses. Even modest cuts can free up cash to cover more urgent needs. Just be sure to track what you’re deferring so you can revisit those decisions later.
Accelerate Receivables
Encourage faster payments by tightening your invoicing process. For example, send invoices immediately after work is completed, offer small discounts for early payment (such as 2% off for net-10), and follow up promptly on overdue accounts. Reducing your average collection period by even a few days can meaningfully improve cash flow.
Tighten Inventory Management
Excess inventory ties up cash that you could be using elsewhere. Audit your stock levels to identify slow-moving products and avoid over-ordering. For example, if one item has been sitting on your shelves for 90 days, consider running a promotion to move it quickly and reinvest that cash into higher turnover inventory.
Adjust for Customer Behavior
If your customers are shifting how or when they buy—such as taking longer to pay or canceling recurring orders—update your cash flow expectations accordingly.
The sooner you detect these patterns, the faster you can revise your rolling forecasts and take action to mitigate potential risks. For example, you might reach out to key customers showing signs of disengagement and take steps to retain them.
Use Liquidity Preemptively
If you have access to a line of credit or another financing option, consider drawing on it before a cash crunch hits you. Preemptive use of liquidity lets you cover expenses without scrambling and gives you more flexibility than waiting until your cash position is already strained. Just be strategic to avoid overleveraging.
Build a Cash-Conscious Operation
Being an effective cash flow manager isn’t just about updating spreadsheets and running forecasts. It also requires a company-wide mindset that treats cash as a shared responsibility. Your finance team may lead the charge, but every department influences how and when money moves through your business. For example:
- Operations teams can flag or delay nonessential purchases
- Sales teams can prioritize deals with faster payment terms
- Customer service can identify early signs of churn that affect recurring inflows
When everyone in your company is conscious of its cash inflows, outflows and reserves, incremental decisions can drive meaningful improvements.
Like all aspects of cash flow management, building a cash-conscious culture is a continuous discipline, not a one-time fix. Embed forecasting into your decision-making processes and train team leaders to understand the effects of their choices.
The goal isn’t to micromanage but to create a culture where cash is respected, tracked and optimized as a part of day-to-day operations.
Leverage External Cash Flow Support
Cash flow management is critical to your small business’s success, but it doesn’t have to be stress inducing. Even in a volatile economic period, you can maintain control with consistent forecasting, proactive planning and a sustainable long-term strategy.
Fortunately, you don’t have to manage it all on your own. Hiring a fractional CFO gives you access to expert support without the cost of a full-time hire. It also provides a fresh, objective perspective, helping you stress-test your plans and identify blind spots.
“[Don’t hire] a full-time person if you can really mix and match full-time talent with the more remote options,” said Brooke.
If you’re ready to level up your cash flow management, explore Paro’s fractional CFO services to match with a professional whose expertise aligns with your goals.
