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How to be more proactive with your company’s finances — And boost cash flow

Expert attention to financial management can kickstart the growth of a small business.

Part 3 in the Managing Growth Series. Read part one: How to avoid a tumble when your business expands. Read part two: Managing talent & cultivating a winning workplace.

Effective management of a small business involves keeping an eye on all facets of that business — from sales and marketing to human resources and inventory control. But arguably the most important aspect is keen attention to the financial picture.

Without consistent monitoring of both expenses and receivables, owners won’t be able to meet payroll, purchase supplies or cover their rent and other operating costs. For many businesses that need to boost cash flow, these situations are all too common.

A survey by Prosperity Now on the financial vulnerabilities of business owners found that 55 per cent of the people who owned firms with five or fewer employees said they could cover only a single month’s business expenses with their savings — and 30 per cent had no savings at all.

Forecast revenue and profits

How to be more proactive with your company’s finances — And boost cash flow

The best way to avoid financial surprises is to maintain a cash flow forecast, which allows the business owner to anticipate fluctuations in the bank balance and take action before problems occur, advises Ian MacFadden, President of RCD Management in Halifax, Nova Scotia.

“This requires a basic knowledge of accounting principles by the owner, and a staff member or contract bookkeeper/accountant to help with the forecast and reporting,” says MacFadden, a former VP at BDC (Business Development Bank of Canada).

And even if money is consistently rolling in, it can sometimes be a misleading measure of success when so much of a growing company’s budget is allocated to the logistics of managing a workforce and expanding the product, according to SurveyGizmo“High revenue can be a mask for a sick company when leadership focuses all of their attention on revenue, and not enough attention on profit,” they report.

Adopt a disciplined routine

How to be more proactive with your company’s finances — And boost cash flow

Entrepreneurs tend to be optimists, so it’s critical they learn to use the forecasting tools in their accounting software to figure out how much cash is really coming into the business. Then they’ll be better equipped to plan for future costs, such as new equipment purchases and the talent they expect to add, says Elaine Pofeldt in Fast Company.

“It’s easy to let invoicing slide when you’re busy, but that’s dangerous,” she says, adding it’s important to establish a discipline in invoicing, collecting payments and getting them to the bank.

It’s equally important to focus on paying bills on time, explains Robert Cordray in Born2Invest. “Ultimately, paying all of your payables on time is extremely important as this will improve your reputation and allow you to get better terms in the future,” he says.

Negotiate payment terms with suppliers

How to be more proactive with your company’s finances — And boost cash flow

Small business owners should always attempt to negotiate better terms with their suppliers. Cordray further explains that “by getting the vendor to extend your repayment terms from 30 to 60 days, you can receive a significant boost in your interim cash flow position. This could also reduce your need to borrow money on a line of credit and be charged interest from your lender.”

Fixing a cash flow problem requires an in-depth analysis to determine exactly what the issues are, and then the development of a plan to take corrective action, MacFadden says. “If a business is losing money, the funding options are limited as banks typically don’t finance losses,” he cautions. “Suppliers can be a short-term source of funds for a good customer by extending their payment terms. The owner may have to temporarily inject their personal equity into the business to prop up the cash flow.”

If the time comes that credit is maxed out, and the business is still challenged, experts say it’s best to be proactive, and not wait for a phone call from the bank demanding its money.

Don’t stick your head in the sand

How to be more proactive with your company’s finances — And boost cash flow

Generally speaking, banks and similar creditors do not like surprises, says MacFadden.

“It’s usually in the business owner’s best interest to keep their creditors well informed of how the business is doing, and to approach them well in advance of any unusual situations requiring their support,” he recommends. “The creditor is going to be much more supportive if the business owner has anticipated the problem, identified a solution and taken the initiative to contact the creditor for guidance.”

MacFadden points out that it may be tempting to let a payment to the bank slide for a month or two. But it’s critical to respect the terms of any creditor agreement. Violating them could result in a creditor declaring a default and demanding payment of the loan. “At the very least, they could impose new conditions with stricter terms, fees and interest rates,” he says.

Click here to read part one in the series — how adopting a disciplined approach to management can ensure prosperity and longevity.

Click here for part two — how talent management and corporate culture is vital to a company’s ongoing success.

 

Up Next: Your start-to-finish guide to developing a winning business every year.

Patricia MacInnis

Patricia MacInnis is an award-winning freelance journalist based in Regina, Saskatchewan. She is the former editor of national industry publications including Computing Canada, and has written extensively on IT for a broad range of print and online publications.

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