Have you ever wondered why the busy business down the street ended up closing its doors?
Or why a seemingly low volume business has stayed stable for years?
Perhaps you have seen a solid business fail when it went through an expansion phase. There may be many reasons to explain the discrepancy, one of which is cash flow.
If I may use an analogy to the human body, cash flow to a business is the bloodline. Business net income may be the heart of the business and assets may be the entire body, but without blood flowing to the body, it dies.
When you think about it, it’s a pretty good analogy. Investment, Net Income, Assets and Cash flow work in tandem to operate successfully much like the heart, blood flow, oxygen and body does to allow the entity to survive. It is a life cycle that requires each part to function properly. The heart (income) pumps the blood (cash flow) through the body, carrying oxygen (investment) to each body part (assets). The more active the body, the stronger the heart to pump more blood to the areas of the body, therefore providing adequate oxygen levels for the body parts to operate with ease and efficiency.
In our society today, cash is not something we see a lot. With credit card debt at an all-time high, and debit cards being used more than ever, handling cash is becoming a thing of the past. More and more transactions are settled using alternatives to cash, such as paypal. And the old proverbial saying, "out of sight, out of mind" rings true when it comes to cash in a business. However, it is crucial to the success of every business to stay on top of cash flow. Let's look at three ways to improve cash flow in business.
1) One of the most common hindrances to small business is outstanding accounts receivable. For every day an account is outstanding, it reduces cash flow as well as reduces income. If you do not have the cash in hand, that is cash that is not put on your line of credit, in your short term savings, or available for reinvestment in your business. Regardless, it reduces your income. If your receivables are out of control, perhaps you need a strategy put in place to make improvements. There are many strategies to control your receivables. Contact an accountant to discuss.
2) Review your agreements with your vendors. What are your negotiated terms? Standard terms are net 30, which mean your payment is due 30 days from receipt of the bill. If you are paying everything as soon as you receive it, you should try and negotiate better payment terms. Our society has trained us well in paying what we owe and try not to owe money. It is a great personal trait and characteristic to have when managing your personal reputation and finances. Equally important is ensuring your business reputation is known for similar principles. If your business pays their bill on time (but no sooner than required unless a discount is offered) consistently, you will become a preferred customer and often times are treated much more favorably. However, please remember, you really should pay your bills on time and not ahead of time unless a discount is offered for early payment. One mistake small businesses make is not negotiating their terms to their advantage. The longer you have to pay your bill, the better your cash flow.
3) Use projections to estimate your cash flow. Most businesses have cycles of cash receipts that may or may not coincide with your income. They may also not coincide with your expenses. Having a projected cash flow statement allows for you to plan to have the cash available when you needed. This will help avoid late payments or even getting cut off from suppliers. The last thing you need is a stock out when you are about to enter a heavy sales cycle. Contact a professional accountant who will work with you to prepare proper reports to help you monitor your business.
Cash Flow is King in small business. Taking the appropriate precautions, implementing key strategies and proper planning can avoid the pitfall that poor cash flow management can bring. If you have any questions regarding this or any other strategy, please don’t hesitate to contact me. We are always looking for great clients.
About the Author
Gerard Jones is a Chartered Professional Accountant and is President and CEO of Atlantic Canada’s first Virtual Accounting firm, BAGE Tax and Accounting Inc. Gerard is very well versed in understanding the intricacies and challenges that small and medium sized businesses face in the 21 century.
Gerard's passion to see small business thrive in the 21 century fuels his determination and "can do" attitude. He balances knowledge gained through practical experience with common sense learned through professional life, to design an affordable solution to ANY business.
If you are a business looking to improve efficiency in your back office, achieve cost savings, embrace technological advances and want to benefit from a new "paradigm", please reach out to Gerard, or BAGE Tax and Accounting by email, phone, or visit www.bage.ca .
Gerard guarantees a cost savings for all new clients. Typical savings will average 25%.
Call now at (902) 407 4204 or email email@example.com