It was a cold November morning in 2013, just after 10, when she sheepishly entered through my office door. Her hair was tangled, her eyes were red with lines of blood and the dark circles under her eyes revealed the lack of sleep she had for the past week. “CRA froze my bank account, please help!” It was a cry I heard many times before. CRA is an acronym for the Canada Revenue Agency, the tax collecting entity for the federal government. “I cannot pay my suppliers, I cannot pay my team, and the line of credit attached to my account is also inaccessible”, she moaned. “Can you help?”
I have dealt with this situation many times before, sometimes successfully, sometimes not. “Tell me what led to this”, I inquired. Her response was one of many small businesses.
Her business has been around for 15 years and she has managed to survive the cyclical business cycle. Two years ago, she decided to grow. She invested into a new building and setup, invested in software and committed to a marketing campaign. She was determined to avoid long term debt so she used the majority of the cash she had accumulated over the years. Her risk seemed to be paying off as sales increased. The problem she ran into was a drain on cash. Unfortunately, she did not have an understanding of the “cash conversion cycle” and the short term affect that growth has on cash flow. As a result, her cash dwindled and her HST remittances fell behind. This is a serious problem as HST funds collected in a business are considered “Trust” funds. In other words, they never belong to the business and there is a director’s liability attached to HST and Payroll remittances. This means the directors of the company are personally liable for the payment of these funds. In extreme cases of abuse, fraud charges could be laid. This happens to many small businesses. However, in this case, it was not of mal intent. She simply ran low on cash and CRA seized her account as prior collections efforts failed.
“I can do my best to try and make arrangements with CRA on your behalf and see if they will release requirement to pay”, I said with understanding. “There is no guarantee, but my experience tells me that if CRA knows you are committed to resolving the issue, they may release your account to allow your business to operate. Typically, HST and Payroll accounts are required to be paid off within 6 months. Let’s see what is doable for you.”
This lady had far more problems with her business than just her HST account. The immediate issue to resolve her HST debt and get her bank account restored, however, the business ended up in this position due to poor cash flow management. Even though her sales were increasing, she ran out of cash. Cash is one of the primary reasons why businesses fail. It is also one of the primary reasons businesses succeed. Many small business owners focus most of their attention on the craft or skill they brought to the business. As long as sales are growing, and expenses are less than sales, they think things are going well. This is a trap most owner managed businesses fall into. Owner Managed businesses MUST focus their attention on CASH. Cash projections, Cash Management, and improving the Cash Conversion Cycle are a must to have a successful small business.
Cash projections start with a realistic and manageable budget. Projecting sales and expenses are only part of the equation. The Balance sheet, what the business owns and owes, is also critical. Too often, owner managed businesses make the innocent mistake of purchasing capital items with cash on hand, leaving the business short of cash. Or if they borrow funds, they often leave out the interest costs for the funds borrowed. Proper planning and forecasting can significantly reduce this risk, and also provide for opportunities that may not have been previously visible.
Cash management is a short term look at where the cash is currently and what is coming up in the near future. Depending on how low cash flow is at the time, weekly or even daily analysis may be necessary. This is a bit challenging as several pieces of data are required to accurately manage.
Finally, the cash conversion cycle is an accounting computation that measures the time it takes to convert cash outlay into cash collection. It is computed by using three key pieces of the business…
1. measuring the time it takes to collect your Accounts Receivable, also known as Days Sales Outstanding,
2. measuring the time you have to pay your Accounts Payable without penalty, also known as Days Payable outstanding,
3. Measuring the number of days it takes to sell the inventory, also known as Days Inventory Outstanding.
Managing Cash in a small business is often time consuming, complex and difficult for small businesses to perform in house, so many of our clients will rely on us to monitor the cash flow.
“ CRA has agreed to release your account immediately and is in the process of sending the release to your bank. You should be back in business later today or tomorrow but I must emphasize to strictly adhere to the arrangements to which you agreed. Additionally, I will immediately set up the monitoring program we discussed to alert us of any future problems with cash flow”, I stated. Her downtrodden face started to lift and this glitter in her eye light up the room. “Thank you Thank you Thank you” she humbly responded.
Since that day, we have enjoyed an amazing partnership with this lady. In addition to preparing all her tax returns and year ends, she relies on us to manage her cash flow. She says it has lifted a huge weight off her shoulders and has enabled her to totally let go of the accounting worries and focus her attention on building her business and performing her tasks. Since that day, there were two other occasions where cash was getting thin, but because we were monitoring, we had time to prepare and place temporary solutions in place so her business was not negatively affected. After all, sometimes it only takes one strike to sink a ship.
She is not the only owner managed business to find herself in this situation. If you have concerns about managing cash flow, or difficulties with CRA, please reach out to us. In addition to typical accounting and tax services, we also have solutions that can be customized to your business and your budget.