A high percentage of business start-ups fail due to cash flow problems. They focus on building a business and ensuring that they have a budget and a profit margin forecast. While these are important for all businesses, cash flow should not be forgotten. Without cash flow it does not matter how big your profits are or how many customers you have. Cash flow is needed for a business to survive.
Here are some tips on how to manage your cash flow:
1 – Build a cash flow forecast
Building a cash flow does not have to be difficult. Once you have your budget or profit margin forecast, you are halfway there. You can use the direct or the indirect method of cash flow. I will explain the difference between these two in the next post.
To help you forecast your cash flow, you should understand your customer’s payment histories to better forecast when you will receive payment.
Tax payments, such as HST payment should be factored into cash flow as well. This is one area most businesses forgot to take into consideration. A business with a positive net income will probably have an HST payment to the government. Remember your HST payment will be the net of the HST you collected on your revenue, less the HST you paid (in other words, the ITC’s) on eligible expenses incurred.
Include capital expenses such as computer, phone system, furniture, large inventory purchases and other start-up costs. Also, do not forget to include loan interest and principal payments.
At the end of each month compare your ending cash flow forecast to your actual cash balance.
If there is a large variance, positive or negative, you should determine the reason and modify your cash flow forecast for the months ahead accordingly, so that you can keep your cash flow forecast as realistic as possible.
Also ensure to update the cash flow as new information becomes available.
2 – Analyze your expenses and cut unnecessary expenses. For businesses selling products, look for lower cost suppliers to make purchases from. With the internet, online purchasing power has increased giving businesses more sources to purchase from all over the world and many times with lower costs. Look at your inventory balances, are you purchasing too much in comparison to the amount you are selling?
3 – Pay expenses based on the due date provided by suppliers, taking full advantage of their payment terms. If a supplier is providing 30 days, don’t pay them early. If a supplier has a short payment term, consider paying by credit card if possible. This will extend the actual cash payment until the time your credit card payment is due.
Ensure to pay the credit card in full when due, so that you don’t incur interest charges. If you do not have the cash to pay off the credit card, consider paying it off with a line of credit because often times the interest rates are significantly lower. The reason I suggest to use the credit card first, is to take full advantage of any credit card rewards that you may get from your credit card company. These rewards can provide you with positive cash flow in the form of cash back rewards or travel points, both of which will save you money. I have a client that purchases the bulk of their inventory online and they use their card credit for payment. These large purchases result in large credit card rewards. They are able to take a free vacation for two every year.
4 – Consider leasing assets instead of buying them to help spread the cash outflow over a long term. In some situations, it may also be an option to purchase used assets instead of new, which also would result in savings. When replacing assets, consider selling your old assets or donating them. There are charities that will issue a donation receipt for computers or furniture. Donation receipts will provide your business with a tax credit at the end of the year.
5 – Revenue collection depends on whether you are providing a service or selling a tangible product. With tangible products, collection is almost always immediately paid in full at the time of sale, while revenue from services are not.
Help to speed up the collection by providing discounts for quick payment, set up clients on auto debit and ask for deposit before the service starts. Ensure that invoices are issued quickly after service is provided. Provide customers with the option of paying with a credit card. You get paid quicker and the client can benefit from any awards they may receive from their credit card.
6 – Have a cash reserve on hand when you start. This could be cash set aside for potential shortfalls or leverage through a loan or a line of credit from the bank that you draw from.
7 – Look at ways you can increase your revenue. Can you add a service or add a product for sale? Look into ways to gain more clients and customer.
8 – Ensure that your bank accounts are reconciled monthly. Sometimes with larger companies, which have large volume of transactions it is beneficial to do a draft mid-month bank reconciliation to stay on top of the cash flow situation.