The end-of-year cash flow checklist for SMBs

The end of the year is always an interesting time for small businesses. For those in retail or e-commerce, the holidays are your busiest period. But regardless of your industry, it’s time to close the books, prepare next year’s budget, and plan for the coming year. 

Either way, there’s a to-do list to tackle. And that should absolutely include assessing your cash flow processes. You may not have a more opportune moment all year to look closely at your revenue streams and costs, and find ways to optimize both. 

Here’s our 10-step checklist to analyze your financial position at the end of the year, with a special focus on cash flow management. 

10-step small business cash flow checklist

Consistent cash flow is one of the most critical—and most overlooked—aspects of running a successful small business. The end of the year is the perfect time to review your cash conversion cycle, update internal systems, and ensure you have smooth cash processes for the year to come. 

Here are the 10 most important cash-focused actions small business owners can take at year end.

1. Create your financial statements

Most small businesses are legally required to create financial statements and share them with authorities. Closing the books and creating your core financial statements are big jobs, and much of the work will be done by your accountants.

The three main statements most businesses should produce are: 

• Profit and loss statement (P&L): This summarizes all your revenue and costs for the fiscal year. It gives useful insights into your operating profits and overall company efficiency.
  
  
• Balance sheet: The balance sheet shows your current assets and debts. This includes outstanding loans, shareholder equity, inventory, and receivables, and provides an equity-to-debt ratio. An individual balance sheet is a snapshot of one precise moment, and isn’t designed to show patterns or tell a story.
  
  
• Cash flow statement: This statement records all cash coming into and out of your business. It’s particularly useful to assess your accounts receivable and payable, and determine your ability to repay suppliers as required. 

These three statements give you most of the data and insights you need to evaluate your company’s financial performance and find ways to be more effective in the new year. 

Because we’re focused on cash flow actions, we won’t go into further detail here. But preparing financial statements is a prerequisite to some of the following steps, so it’s an essential place to start.

2. Analyze your operating cash flow

Now that you have the above statements in place, it’s time to look closely at cash flow management. In particular, look for patterns and changes in your working capital requirements (WCR). This is the amount of capital required to run your business day to day. 

Key questions to ask: 

• Has revenue increased or decreased meaningfully in the past year? 
• Has our spending increased or decreased over the same period? 
• What is the relationship between what we’re spending and revenue? 
• Have we relied more on financing this year, and has that led to greater fees?
• How much are we investing in research, development, and new products?

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It’s also a good time to calculate your working capital requirements, which is relatively easy once your balance sheet is prepared:

WCR = current assets - current liabilities

Has this WCR changed since the last time you calculated it? And do you still access to the cash you need to run your business successfully?

Optimizing working capital is an art in its own right, but the basic principle is you want enough cash available to invest and grow. 

The end of the year is a great time to figure out whether you have debts and liabilities tying cash up, or if you could invest more with the cash you currently have available. 

3. Collect receivables and review your payment processes

There’s never a bad time to get paid. And ideally, your accounts receivable process would tick along predictably and efficiently. But since we’re preparing closing statements and hoping to start the new year fresh, it’s best not to have outstanding payments hanging around. 

So first, encourage any late-paying customers to settle their debts. This could involve a simple reminder, a polite call from a salesperson, or a more formal notice. 

The good news: your customers will be doing the same exercise, too. They also don’t want to carry over debts and liabilities if they can help it. So you may be able to encourage late payers to finally close their accounts. 

And also think about whether your current processes are the best they can be. If you consistently have to wait for customer payments, is there a way to overcome this issue?

The end of the year is an arbitrary deadline, but it may be just the milestone that both your customers and your own team need to get this done. 

4. Inspect accounts payable

This is also the right time to look at your outstanding debts and ensure you’re not paying overdue fees or holding onto cash unnecessarily. These additional costs can sneak up on you and obviously directly eat into profits. 

Even if you consistently pay on time, optimizing payment terms with suppliers may also be useful. For example, negotiating longer payment terms gives you more flexibility to put cash to greater effect.

Particularly if you offer long payment terms to your customers, it helps to keep hold of cash and delay payments (within reason) to your own suppliers. Just as long as you respect these vital partners, and nurture your valuable relationships. (More on this shortly.)

5. Conduct an inventory audit

As part of preparing your balance sheet, you’ll have to account for any unsold inventory as assets. But the end of the year is also the right time to address your stock purchasing process overall.

• Are you holding the right amount of inventory at any given time? 
• Or are you over-investing and tying up cash that could be better spent elsewhere? 

As we’ll see next, the amount of time stock goes unsold is a key factor in small business cash flow efficiency. It costs money to store goods—particularly if they’re oversized or perishable—and you also have to spend to actually acquire them. 

Evaluate your inventory flow and try to find the right balance between oversupplying and running out of goods to sell in the new year. 

6. Examine your cash conversion cycle

Your cash conversion cycle (CCC) is the time it takes your business to turn inventory into sales. To measure it, follow this formula: 

• Days Inventory Outstanding (DIO): how long you hold onto inventory, on average; PLUS
• Days Sales Outstanding (DSO): how long it takes the average customer to pay; MINUS
• Days Payable Outstanding (DPO): how long it takes you to pay suppliers, on average.

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The goal is to have as short a cash conversion cycle as possible, measured in days. If you have a cycle of 10 days, that means it only takes you (on average) 10 days to turn inventory into revenue. 

We looked at inventory, receivables, and payables in our previous three steps. Improving any of these processes will have a positive impact on your cash flow for the new year. 

And logically, if one process is lagging behind and far less efficient than the others, address that particular hurdle first.

7. Fix your cash flow red flags

There are doubtless parts of your business that always cause frustration, or could be efficient. So in the spirit of New Year’s resolutions, make it yours to fix them for good. 

This can include relatively simple things like a faulty credit card machine, lots of abandoned carts at checkout, or paying for duplicate software licenses. These all eat into your profit margins, and identifying these issues can lead to quick fixes.

You may also have more systemic problems, like high amounts of debt and rising interest fees. It takes discipline and hard work, but paying down some of this debt may reduce a serious burden, and again lead to higher profits. 

Set a clear goal to address these in Q1 of next year. Don’t bite off too much at once, but start tackling these issues and creating a more cash-efficient business for the long run. 

8. Revisit your pricing

Perhaps the simplest way (in theory) to improve your cash flow is to raise prices and bring in more revenue. You may not have made major pricing changes in some time, and supply chain changes and inflation could mean your current charges don’t reflect your products’ true value. 

It’s particularly helpful if you know your profit margins for specific products, and can see how these have evolved over the past year. If you maintain a healthy margin on certain goods, it may be counterproductive to charge more. The market may not support it. 

But if the cost of goods sold has increased in some areas, and you reasonably believe that people will pay more than they do today, then raising prices is a logical next step. 

9. Check in with suppliers

Year end is about more than crunching the numbers. It’s also a good time to reach out to key partners and suppliers and make sure they’re happy.

Strong supplier relationships are priceless for small businesses. You need partners you can rely on, trust to deliver on time, and who have your best interests at heart. 

Even something small like a holiday card or a token gift can make a real difference. Remind them that you’re all part of the same ecosystem, and that their success is yours, too. 

On a more practical level, it may be a good time to negotiate new payment terms or even supplier discounts. Prove that you’re one of their top customers, and try to find win/win conditions that suit both parties.

Surviving and thriving as a small business is a major accomplishment. Good partnerships help make this possible, and build a better marketplace for all. 

10. Forecast future cash flow needs

The final step is to look at the year ahead. How do you expect business to be over the next 12 months? Based on the way things are currently going, and your informed projections for the year ahead, do you have any serious cash flow needs or concerns?

Forecast in this sense sounds highly technical, but it doesn’t need to be. Just consider a few factors:

• Is your current cash flow sufficient to comfortably handle working capital requirements?
• Do you anticipate an increase in demand (more sales) in the year to come? 
• Are there good reasons to expect increased supply chain or labor costs in the next year?
• Do you have clear actions to respond to significant changes in your market or supply chain? 

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That last question is probably the most important. While a forecast is a helpful tool, it’s your plan of action that will actually make a difference. 

And for most SMBs, that means quick access to funds. Working capital loans, for example, let you raise money against outstanding receivables or payables. This is a great tool to speed up a slow cash conversion cycle or repay suppliers ahead of schedule. 

To prepare for the coming year, simply identify the best short-term financing options—both the forms of funding and suitable providers. Having them in your back pocket means you’re ready for whatever the new year throws your way.

Make your year-end period count

The end of the year is a time for reflection, to shine a spotlight on your company’s biggest flaws and strengths. And cash flow management should be right at the top of that list. 

Overall, the above checklist and resources can be summed up as follows: 

• Assess business performance over the past year and find your most obvious strengths and weaknesses.
• Dive deeper into cash flow, and identify ways to optimize this crucial aspect of running your business.
• Look ahead to the next 12 months, and prepare for any likely changes to come.

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If there’s one often-overlooked consideration among all the advice above, it’s access to capital. The ability to raise funds quickly—either in response to surging demand or slow sales—can make or break your small business. 

For help with this particular issue, here’s a great resource on small business cash flow loans. Here’s to a bright and profitable new year!