Cash flow issues are one of the main reasons businesses fail, even when they show profitability on paper. How can you make sure it won’t happen to you? Strong bookkeeping practices for cash flow management. The good news is that most of them are straightforward. The bad news? Staying consistent with them over time is where the real challenge lies.
Here are seven bookkeeping practices to help you manage your cash flow and stay ahead of the curve.
1. Monitor Cash Flow Regularly
We all know that keeping a close eye on cash flow is important, but let’s be real – between client work, daily operations, and life in general, it’s easy to let it slide. Suddenly, cash shortages or unplanned expenses have you thinking, “Where did that come from?“
Staying on top of your cash flow and understanding how to manage it help you catch potential issues before they become a big headache. Plus, you’ll start to spot patterns—like those inevitable seasonal slowdowns—so you can adjust spending or ramp up marketing efforts.
How to actually do it to avoid poor cash flow management:
- A quick weekly or monthly check-in can be the difference between staying afloat and treading water. Your accounting software probably already generates a cash flow statement (if not, it’s time to set it up). This statement gives you a snapshot of money coming in and going out.
- Don’t just glance at the numbers. Start paying attention to the trends. Are you running into cash shortfalls right before you receive payments? Or do you notice you’ve got more cash sitting idle than expected during certain months?
Pro tip: Automate your company’s cash flow management as much as possible. Ask your bookkeeper to set up alerts in your accounting software that flag potential issues like low cash reserves or unexpected surpluses. Better yet, have them create automatic cash flow reports that hit your inbox regularly so you can stay in the loop. Do you need help reading the trends? Your bookkeeper can often spot early warning signs that aren’t immediately obvious.
2. Keep Accurate and Up-to-Date Records
Successful cash flow management starts with accurate financial records. But, some invoices can easily fall off the radar when you’re 100% focused on client work. The problem? When you lose sight of your records, you open the door to costly mistakes—like running into negative cash flow, paying more taxes than you should, or missing out on opportunities to cut unnecessary costs.
How to stay on top of it (even when you’re busy):
- Implement a system that works for you, not against you. Create a routine where capturing transactions becomes automatic. For example, link your accounting software directly to your bank accounts and credit cards to pull in every transaction automatically. No more hunting down receipts or wondering if you’ve forgotten something—it’s all in one place, updated in real-time.
- Make sure every invoice, receipt, and financial document gets into your accounting software as quickly as possible. Use mobile apps that allow you to snap photos of receipts on the go and upload them directly into your accounting system. Or, put everything into a shoebox and ship it to your bookkeeper—yes, we’re doing it at Growfair, and it works.
- Set up weekly or monthly “money check-ins.” These are short, recurring sessions where you (or your bookkeeper) review and reconcile your accounts. Think of it like cleaning your desk—it stays manageable if you do it regularly. During these check-ins, compare your bank and credit card statements with the transactions in your accounting software.
And while we’re on that note—having a reliable bookkeeper on your team is a game-changer. But more importantly, they can help you with cash flow analysis to identify trends, spot unusual transactions, and ensure you’re not paying for services you no longer need (it happens more than you’d think!).
3. Use a Cash Flow Forecasting Tool
Many of us think we can rely on our memory: we think we know what’s coming in and out—until we don’t. Overconfidence can be a silent killer for a healthy cash flow. Even the most seasoned business owners get blindsided by unexpected expenses or cash shortages. This is where a cash flow forecast comes in: it’s like a crystal ball, giving you a heads-up before things get tight. Instead of putting out fires, you’re planning smart moves before anything gets out of hand.
How to create a cash flow forecast:
- Analyse past financial data and make educated guesses about future cash inflows and outflows, including free cash flow, to get a comprehensive view of any cash flow problems. Track an entire year, at least. This helps you spot seasonal trends or unusual spikes in spending. Did your utilities surge last winter? Was there a dip in revenue last summer? These kinds of patterns help you fine-tune your forecast.
- Remember one-time expenses or investments, like replacing equipment or hiring contractors for special projects. These big-ticket items can disrupt your cash flow if not factored in beforehand.
- Use tools to make this process easier. Your accounting software should have a built-in forecasting tool that will save you a lot of headaches. If it doesn’t, your bookkeeper likely has a cash flow forecast template you can use.
Pro tip: Set up reminders or alerts that prompt you to revisit and update your cash flow forecast at the end of each month (or even weekly if you’re running a fast-moving business). The trick is staying engaged, adjusting as you go, and letting it guide your decisions so you’re always one step ahead.
4. Invoice Promptly and Follow Up
Chasing invoices is one of those tasks we all know is necessary but easy to postpone, hoping the money will magically appear. Spoiler: It rarely does. However, timely invoicing and follow-up are essential for steady cash flow. Unpaid invoices and late payments can create serious cash flow issues, making it difficult to cover expenses, pay vendors, or meet payroll.
How to tackle this without burning out:
- Invoice immediately. The second you wrap up a sale or complete a service, get that invoice out the door. No more waiting until the end of the week or month—send it while the project is still fresh in everyone’s mind. It shows you’re professional and serious about getting paid.
- Set clear payment terms, like “Net 30,” and make sure your clients are fully aware of them upfront. Additionally, consider offering early payment discounts to incentivise prompt payment and improve your cash flow. When the due date passes, and you haven’t received payment, it’s time to act. Here’s a less obvious tip: don’t just wait for the due date to pass. Send a friendly reminder a few days before the payment is due—people get busy and might forget.
- Use your accounting software to automate the entire invoicing and follow-up process.
Pro tip: Hand this off to your bookkeeper. They’re pros at managing invoicing and follow-up, and they can handle things more smoothly because they’re not emotionally tied to the client relationship.
5. Negotiate Vendor Payment Terms for Better Cash Flow
Many people think payment terms are set in stone. However, many suppliers are open to extending terms, like moving from Net 30 to Net 60 or even Net 90. This gives you extra breathing room to manage your finances, freeing up cash that you can use for other critical expenses like payroll, marketing, or inventory.
How to make it happen:
- Don’t hesitate to ask for extended payment terms when negotiating with your suppliers. Consider offering something in return, like placing larger orders or agreeing to more consistent purchasing.
- Another thing most people overlook is the role your bookkeeper can play here. They’re not just there to crunch numbers—they can help evaluate your vendor contracts and spot opportunities for negotiation. Have them review your current terms and highlight any vendors who might be open to a conversation. In many cases, bookkeepers can even step in and handle these negotiations for you.
Pro tip: Sometimes, smaller vendors are more flexible because they value long-term relationships and consistent business. And don’t just think of this as a one-time deal. Regularly revisit your vendor agreements as your business grows and evolves. What worked a year ago might not fit your needs today, and keeping communication open with your suppliers can lead to more favourable terms in the future.
6. Set Up a Cash Reserve
We’ll keep this real—these are tough times for many small businesses, and putting cash aside feels unrealistic. When you’re barely keeping things afloat, the last thing on your mind is building up reserves. But here’s the kicker: even in the leanest of times, you can build a buffer without draining what little cash you have on hand. You have to get a bit creative.
How to make it work, even when cash is tight:
- Start small and smart to generate positive cash flows. Instead of aiming for that textbook “three to six months of operating expenses” right off the bat, focus on micro-savings. For instance, set aside just 1-2% of your profits (even if it’s only £50) in a separate account each month. It may not feel like much at first, but it builds up over time, and more importantly, it gets you into the habit of saving.
- Instead of focusing exclusively on setting aside cash, try reducing your operating costs or securing alternative financing options. For example, could you lease equipment instead of buying it?
- Work with your bookkeeper to identify unnecessary expenses or subscriptions you’re no longer using—eliminating these can free up cash you can divert into your reserve.
- Try setting up a “savings sweep” system with your bank: Any extra funds in your main account above a certain threshold automatically get swept into your cash reserve account. This method works in the background without requiring you to think about it constantly.
- Consider diversifying your income streams. Can you offer new services, create digital products, or develop a subscription model for existing clients? Even a small boost in revenue can go directly into your cash buffer.
Pro tip: Bookkeepers can be a goldmine for building a cash reserve strategy. Beyond just calculating the “right” amount to save, they can help you automate the process. It’s one less thing for you to worry about, and it ensures that you’re consistently growing your buffer, even when times are tough.
7. Separate Business Cash and Personal Finances
Separating accounts often feels like just another headache—more paperwork, more accounts to manage, more hassle. And so, many postpone it until it becomes necessary. But here’s the deal: separating your personal and business finances isn’t just about ticking off a box on your “good business practices” list.
When everything is in one place, it’s almost impossible to know exactly how much money your business is making versus how much you spend personally, complicating cash flow management. This confusion can lead to overspending, under-saving, and a lack of clarity on what’s really driving your business forward.
How to make it happen without adding to your stress load:
- Open a separate bank account and get a dedicated business credit card. Pay every business expense from your business account, and send all the income straight into that account. Your life is so much easier at tax time because you’re not sifting through piles of mixed receipts.
- Set up automatic transfers to your personal account for a “salary.” Transfer a set amount of money to cover personal expenses at regular intervals—say, weekly or biweekly.
Pro tip: Get your bookkeeper on board with this process to streamline the cash flow management process. They’ll also be able to reconcile your accounts properly, reducing the risk of errors and keeping your business and personal expenses on different paths.
What’s Next: First 3 Steps to Improve Business Cash Flow Management
Getting a handle on your cash flow is manageable. Start small, take it step by step, and you’ll quickly gain control over your finances. Here are the first three steps to set you on the right path:
- Set up accounting software that helps you monitor and manage your cash flow. You’ll have a clear view of your income and expenses.
- Create a cash flow forecast for the next six months. This will give you a forward-looking view of your financial health and help you adjust for any trends or changes in your business.
- Start building a cash reserve by putting a percentage of your monthly profits into a separate account. This will be your safety net for unexpected expenses or seasonal slowdowns.
Do you need help implementing these steps? Whether you need help setting up the right accounting software, creating an accurate cash flow forecast, or automating a system to build your cash reserve, we can streamline the process and free up your time to focus on what you do best.
Get in touch today to learn more about how our bookkeeping services can make your cash flow management smoother and stress-free. Together, we’ll get your finances on track and give you the clarity and control you need to grow your business.