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How to manage your small business cash flow & breathe easy

Essential tips for SMBs to maintain strong financial health.

The money crunch is something every small business owner will grapple with at some point in the lifetime of their business. If lines of credit get maxed out or customers don’t pay their bills on time, calls from the banker might start to roll in. 

While you don’t need a degree in accounting to run a successful business, owners should have some basic bookkeeping skills to ensure there’s enough money on hand to run their operations, says Ian MacFadden, President of RCD Management Inc. in Halifax. 

MacFadden, who is a former VP at Business Development Bank of Canada, says astute financial management improves a business’s profitability and reduces the risks of insolvency and internal fraud.  I’ve found that many small business owners lack an understanding of the fundamentals of cash flow, and how a dollar generated from a sale winds its way through the balance sheet, income statement and into their pocket,” he says. 

He notes the worst mistake SMB owners can make is the failure to take an active role in the financial management of their companies. “Most entrepreneurs have little, if any, experience in accounting or finance and often leave this critical component of the business to others,” he explains.

Cash flow projections

small business cash flow

MacFadden says that the best way to avoid surprises is to maintain a cash flow forecast, which allows owners to anticipate changes in their bank balance and take appropriate action before problems occur.

Although cash flow management is a foundational discipline for all companies, it’s not something Canadian firms have excelled in, according to the Financial Post.

A 2014 survey by BDC underscores the lack of attention that small businesses are paying to the issue. They state that just 57 per cent of those companies with fewer than five employees prepared cash flow projections.

This number rose directly with company size, but not by enough. Even among those SMBs with 100 employees or more, almost an eighth still failed to project their cash flow.

Symptoms of a shortage

small business cash flow

One of the most common issues that trip up many owners is the collection of receivables — in particular, when that isn’t diligently managed, MacFadden says.

“Slow paying customers will put a drain on cash flow, so overdue accounts need to be closely monitored and action taken quickly. The longer the account is overdue, the harder it becomes to collect,” he advises

MacFadden explains that in most cases, a shortage of cash is a symptom of an underlying problem — similar to how a cough is an indication of a cold. So remedying the issue begins with identifying the cause.

“The most serious problem is that the business has become unprofitable, due for example to a decline in sales or rising costs of operations, or both,” he says.

Be prepared for a windfall

small business cash flow

But sales growth can be equally challenging for the business’s balance sheet, he adds.

“It can seem counter-intuitive to the inexperienced business owner, but an increase in sales, or even one unusually large sales order, can quickly drain the bank account,” MacFadden says. “That’s due to the need to invest in people, inventory and related expenses to fulfill the sales orders well in advance of receiving payment from the customers.”

In that scenario, a bank might consider extending a line of credit or overdraft facility. Generally speaking though, MacFadden says banks are “low risk” lenders and will not be enthusiastic about financing companies in difficulty, where their funds would be at above normal risk.

“My advice to small business owners is to not rely on their banker to save the day when financial difficulties arise, and to have options available to see them through the ups and downs that are bound to occur,” he says.

Get a grip on cash flow

small business cash flow

Actively managing your business’ finances can start with some straightforward practices that you should perform regularly. Smallbizdaily.com offers the following tips to help entrepreneurs get a grip on cash flow:

  • Monitor your cash flow weekly (or more often if you’re really having problems) using your business accounting software.
  • Invoice customers as soon as possible. Instead of waiting until the end of the month, invoice as soon as the product or service is delivered.
  • Follow up on invoices promptly. Many accounting or invoicing software apps can automatically follow up with customers as soon an invoice is due.
  • Go online. If you still send invoices by mail and then wait for checks to arrive, you’re wasting a lot of time. Instead, get set up to issue invoices and accept customer payments online. You can also deposit checks from the comfort of your office by scanning or snapping a photo with your smartphone.

 

Up Next: Should you hire full-time workers or contract workers for your business?

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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