The Critical Role of Cash Flow Management

Cash flow is the lifeblood that keeps businesses moving. While turning profit is undeniably important, tracking, analyzing, and optimizing the inflow/outflow of cash is the balancing act to help position your business to meet its obligations, weather unexpected challenges, and seize growth opportunities.

To understand the importance of managing cash flow, consider a specialty foods distributor that sells packaged dried goods. Even if the business is profitable on paper, if there are delays in customers paying their invoices, the owners may struggle to cover monthly rent, utility bills and payments to suppliers. This cash crunch could force the business to take out a high-interest loan or even consider closing altogether.

The reality is that effective cash flow management can do more than just keep your business afloat—it can help propel it forward. But this is proving to be a challenge for many small and medium-sized businesses. A recent research report from Pathward found that small businesses with revenue greater than $10 million are struggling with cash flow levels. In the 7 to 12 months preceding the survey, 34% of these small businesses reported having just enough cash on hand to stay operational.

While this is concerning, businesses can act today by understanding common cash flow issues and implementing best practices to help maintain cash-on-hand. By doing so, they can better meet the demands of their marketplace and cover day-to-day operations, as well as seize new growth opportunities and expand their business. 

One of the most common cash flow challenges is customer invoices being paid beyond agreed-upon trade terms. This problem can severely impact a company’s working capital and ability to meet its own financial obligations. When customers delay payments or disregard payment terms, it creates a ripple effect throughout a business’s financial ecosystem.  

Over-purchasing of inventory happens when companies buy more stock than they can reasonably sell or use in the short term, which ties up valuable cash in idle assets.  

Fluctuating customer order flow and payments can create challenges to a company’s financial stability and make it difficult to plan for future expenses or investments. For example, a seasonal outdoor equipment company might experience a surge in sales during their peak months but struggle with cash flow during the off-season. 

Urge to splurge? Resist it. Most cash-flow problems stem directly from overspending.  According to study by U.S. Bank, 82% of small businesses fail due to cash flow mismanagement, with overspending as a significant factor. Of course, cutting expenses is easier said than done. Before businesses can cut back, they need to know exactly how and where their business is spending money.  

Performing a comprehensive cash flow analysis is another vital cash-management tactic. This involves tracking cash coming into and going out of the organization, both in the short term and long term. Cash flow statements, projections, and variance reports can provide valuable insights into payment patterns, working capital needs, and potential bottlenecks. Imagine a small manufacturing firm that conducts regular reviews of cash inflows from sales and cash outflows from expenses like materials and labor. The company notices a pattern of delayed customer payments causing a cash crunch at the end of each month. Armed with this insight, the company can review options to help stabilize or offset cash restricted periods.  

Using a business line of credit can be an effective way to manage cash flow volatility. These flexible financing arrangements allow companies to access short-term funds as needed to cover operational expenses or capitalize on emerging opportunities. By tapping into a line of credit, businesses can maintain adequate liquidity without the fixed repayment schedule of a traditional loan, smoothing out cash flow challenges and supporting overall financial resilience. 

Asset-based lending offers a flexible way to secure working capital by leveraging a company’s existing assets, such as accounts receivable, inventory, or equipment. Instead of giving up equity or taking on rigid loan terms, businesses can access a revolving line of credit tied to the value of these assets. This allows companies to better manage fluctuating cash flow without compromising ownership or long-term growth plans. 

To help secure a stable future, businesses must understand cash flow’s importance, conduct regular analysis and forecasting, and adjust strategies as market conditions evolve. Whether it’s leveraging lines of credit or utilizing asset-based lending, Pathward can help your business effectively manage the working capital it needs to thrive in any environment.  

Explore Pathward’s tailored solutions to maintaining healthy cash flow and driving sustained business growth.