Business Round Table: 30 Experts Share Top Cash Flow Tips
Cash flow is the life-blood of every business. Shortfalls can create a crisis, sometimes even leading to business closure. Cash truly is king.
We reached out to 30 finance and business experts for their best advice on taking control of your cash flow.
Here are the replies to help you fine tune your strategy!
A well run business should build a 13 week cash flow forecast that takes into account the exact week in which a payment is expected to be either received or sent out.
It gives management the ability to understand their cash needs over the next quarter and make smart decisions about how to manage their working capital and when to make active decisions to stretch it out.
Always know what deals and prospects you have in your sales funnel. Companies typically run into cash flow problems because they work hard bringing in deals, then they coast because money is in, and in the meantime they forget to continuously prospect and bring in more deals. They create a panic situation because revenue is not coming in fast enough to match their expenses.
By consistently prospecting, knowing how many people are interested in buying, how many are in discovery phase, and how many are in proposal stage, you can predict and better manage your cash flow. In the event a deal doesn’t come through you have plenty of other clients you can move quickly through the sales cycle to ensure you always have more revenue than expenses coming in on any single month.
Unlocking the secret of your cash flow comes from first understanding how long it takes your business to spend cash on your resources to produce sales and then convert it back to cash.
This fundamental information is easily calculated from your financial statements, and gives you a starting point upon which to improve your cash flow. It’s known as your Cash Operating Cycle, or Cash Conversion Cycle. With this financial intelligence, you can benchmark your current time (expressed in days), then monitor the changes as you begin to implement strategies to improve. The three major components for calculating your Cash
Operating Cycle are:
· Accounts Receivable
· Accounts Payable
For example, if you improve your Cash Operating Cycle by 10 days and your average daily sales are $10,000 your cash flow increased by $100,000 (10 days x $10,000 sales per day). In other words, you now have $100,000 more cash to operate your business, and you didn’t have to borrow it. The faster the Cash Operating Cycle, the less working capital is required to run your business.
Rick Arthur is a CFO with a CEO perspective, working with growth-oriented companies to implement financial intelligence. He brings financial goal clarity – improving cash flow, profitability and company value. With more than 35 years’ experience in senior financial roles and as the former owner of a $20 million company, Rick’s expertise encompasses hands-on accounting and creating big picture solutions for strategic planning, financing and growth.
CFO of Alberta Women Entrepreneurs (AWE)
If a business’s cash flow is not managed properly, the business may not have the ability to pay its bills on time, which can lead to poor credit and difficulties getting small business loans.
These steps will help you improve your cash flow:
• Ask for the longest payment terms possible. Longer payments terms provide more of a buffer between your receivables and your payables, you have a better chance of receiving enough cash to meet your business needs.
• Get customer collections under control. Closely monitor your account receivables. One of the largest cash problem is customers who don’t pay on time. When customers fail to pay, the business doesn’t take in any revenue, which throws off the financial plan.
• Consider expanding line of credits. Your business can use credit to help it hold on to more cash to meet your business needs.
• Renegotiate rates for suppliers and contractors a least ones a year.
CPA & Partner at Maddocks and Mallett LLP
Make sure your accounts payable and accounts receivable listings are correct and up-to-date. This sounds ridiculously simple, but we frequently find that bills or invoices haven’t been recorded. They’re sitting in an inbox or on a spreadsheet somewhere. Whilst the owners often know about them, it’s very hard to work with information that is scattered everywhere. Get it all in one place. This is what accounting software is for: it gives you a clear picture of your current status.
It used to be that AR and AP would fall behind due to the amount of data entry required. That really doesn’t hold up as an excuse anymore. Modern software can pull information in from a variety of sources so it’s really easy to keep the system current. If you’re a small business, and you’re not using cloud-based software, then you’re just making your life hard.
Senior Director with Alvarez & Marsal Canada
At Alvarez & Marsal, we deal with companies in financial distress. We often see problems arise when small business owners/management do not understand their cash flow cycle, and/or they tend to rely on high level financial information without digging into the specifics.
Small businesses need to be aware of specific strains on cash flow which may include annual insurance premiums, property tax payments, quarterly or annual GST payments etc. Looking at the monthly financial statements or the bank balance won’t paint a full picture, especially when there may be a pile of supplier invoices sitting on someone’s desk that haven’t been entered into the accounting system.
There are three main tactics small businesses can use to take control of their cash flow.
• Understand your cash flow in detail – Small businesses need to actually spend the time to really understand their cash flow, which would include understanding the lag times for collecting receivables as well as understanding which payables can be stretched. There will always be points in a fiscal year where cash flow will be stretched and small businesses need to plan for those times. Make sure you are using a proper accounting software program that is easy to use and has enough flexibility to allow you to see where you were and where you are going.
• Make sure your banking arrangements are sufficient for your needs – Small businesses need to spend the time with their bank to make sure that they have enough flexibility in their operating line to allow them to continue to operate without worrying whether payroll or critical supplier payments will be made. Or, if an operating line is out of the question, small businesses need to consider where that emergency cash will come from. One tactic that is often employed by a distressed business is to forego paying Canada Revenue Agency the payroll withholdings or GST. This is one of the biggest signs of a distressed or failing company that we often see.
• Hire someone to help – Small business owners may not have the time to compile or figure out all the financial details of where their company is at. Hiring a competent accountant (either internally or externally) to help compile the financial statements will help to ensure that the financial information that is needed to make critical decisions is accurate and timely.
When small businesses are growing, there is less and less time to spend with the accounting details. Once the accounting and cash flow concerns start distracting owners from how they do business, it will affect the entire business. You don’t have to do it all on your own. Hire someone to help put the information together and to deal with the bank.
Above all, if you see signs of trouble, talk to an expert before it’s too late. We have seen many owners who have cashed in their future by mortgaging their houses, cashing in RRSPs, borrowing from family, and their businesses still failed. Be proactive, get control of your cash flow by understanding it in detail, and be proactive if you need help.
Cal Shulha Bio:
Cal Shulha is a Senior Director with Alvarez & Marsal Canada. A senior restructuring and business professional in the Edmonton and northern Alberta restructuring industry, he has 15 years of experience in turnaround advisory and insolvency services.
St. Arnaud Pinsent Steman Chartered Professional Accountants
Cash flow is the lifeline of your business. An owners first responsibility is to make sure there fuel in the tank to start the engines of commerce each and every day.
In practice this means you have to be disciplined. You must make sure that there is time in your day (or strict accountability for someone else to ensure that there is time in their day) to do the mundane task of making your bank deposits, clearing your electronic transfers, Paypal and credit card receipts. Equally important, you need to have the discipline of invoicing your customers regularly, setting an expectation that you’ll actually be paid regularly, following up when customers are tarty with their payments and communicating consequences (ie removal of your services) if you’re not paid.
This discipline will lower the stress that you feel as you’ll always know where your organization stands from a liquidity position. Frankly, there are simply too many other things that bring stress to an entrepreneurs life to have to worry about getting your hard earned cash to the bank.
Manager Cloud Accounting, BDO Canada
The important key in managing Cash flow is always have a budget planned. Then monitor the day-to-day activities and make any changes necessary reacting to the economic environment as well as any significant variances.
It also helps to maintain a good and close relationship with your Banker(s) and Vendors. This is a very important relationship to work at and maintain as they can rescue you in unexpected situations you might find yourself in.
Also, it depends on the industry you’re in as some will require more frequent monitoring while others do not. As in the hospitality industry, there is virtually no Receivables and therefore it is crucial to maintain a close eye on your cash flow.
Rob Farrow, CPA, CGA
Rob Farrow CPA – Tax for Innovative Companies
There are really 2 key considerations to managing cash for a small business:
1. Keep it simple
2. Everything is about people
When I first studied accounting as a student, my instructors drilled into me the importance of the KISS Principle – KEEP IT SIMPLE STUPID!
Simply put, you can’t manage something you can’t understand. As a manager you need to develop proxies for what you need to know. Some people call these KEY PERFORMANCE INDICATORS (KPIs).
Of course the specific KPIs aren’t exactly the same for every small business.
These days many great sources of information are available online for next to nothing –
1. Online banking information is often a pretty good proxy for available cash
2. Credit card statements can represent payables (for suppliers)
3. Build a quick and dirty model for recurring costs (payroll – rent – etc)
4. Keep some form of accounts receivable (if applicable) and invoicing information up to date
Back in the day we used to say TIME is MONEY.
Your people are your most important resource. People need to eat every day and pay the rent. So it costs money to keep staff (even if it’s only yourself). So effectively you acquire blocks of time at a cost, which really translates to paying for time.
But people are also the only way you create value. Getting the right people and helping them to be productive is perhaps management’s single most crucial task.
But it doesn’t stop there. Your customers are people and you have to understand what motivates them to buy – and to pay you!
Heck – even tax audits are always at least somewhat about people. While tax rules may seem pretty cut and dried, there’s actually a lot of subjectivity involved:
1. What is the fair market value of an asset exchanged for services?
2. Is an asset inventory or is it capital in nature?
3. Is a development project eligible for scientific research tax credits?
4. Does your company have a permanent establishment in the US?
5. Does your business have ‘nexus’ in the State of California?
In some cases, if you routinely take aggressive filing positions you may encourage the tax auditor to take aggressive assessing positions. You should avoid making your displeasure with the audit process too obvious. Instead show your enthusiasm for what you do. (My mother used to say: “If you can’t say anything nice, don’t say anything at all.”) If the auditor likes you and what you’re doing, they are more likely to be reasonable when judgement is required.
If I were to give one straightforward tactic for improving cash flow I would recommend implementing an AR process and schedule.
An AR schedule is relatively easy to set up. I suggest implementing a 30 – 60 – 90 – 120 day schedule and build what activities would like to do at each stage in your AR process.
A simple AR process can look like this:
1. Create a credit policy form for customers that would like to purchase on account (this helps mitigate bad debt)
2. Make sure the invoice is correct and sent to customer as soon as possible (correct invoices decreases disputes and back and forth – time saving)
3. Call/email customer on day 10 to ensure invoice has been received
4. Follow up with customer on day 30 to acquire about payment and timeline
5. Follow up again with customers on day 45 and/or 60 if payment is not received
6. Apply interest charges if payment is beyond a specified days (you can also apply other incentives to speed up the payment process – 1-2% off if paid within 30 days for example)
7. Block account or ability to purchase if payment has not been received within specified days
Measure your process
• AR days (are they coming down? what is your target?)
• Number of correct invoices issued
• Number of errors in invoices
• Number of calls made to customer
Richard Dang, CPA
Review your payables listing and perform a cost benefit analysis on all aspects of operations:
Determine if the expense is providing value to your company, if not, reduce the expenditure such as scaling back on advertising, reducing office space and cutting back perks to customers and employees;
If your company has business relationships with multiple suppliers, communicate to them and inquire on who can provide the best pricing or discount on purchases;
Determine if your company can minimize non-essential cash outlays such as delaying computer hardware and software upgrades, allowing business or operating licenses to expire and reducing volume purchase of office supplies or materials that will not be used immediately.
CEO, Boast Capital
Stay on top of your real monthly spend including miscellaneous expenses. Most companies only identify the major expense in cash flows such as payroll, rent. They forget about the miscellaneous expenses such as BD team expenses, one off marketing, consulting, etc. which are all variable and make a big difference on cash flow. Also identify the payment terms in invoices and pay them on time (not early and not late with a penalty).
Partner – McRally Accountants
I find it beneficial to have a forecast so that you can understand what your cash requirements are for the coming weeks/months. Then it’s just a matter of ensuring that you have enough cash and income to cover those expenditures. By using a forecast, you give yourself a timeline and create accountability for when you need to collect money or raise capital by.
Set clear payment terms during the sales process with backup payment methods.
Most people dismiss explicitly talking about payment terms because it’s uncomfortable. We believe we understand how our customers think and blame the market or the industry for poor collection terms. But, we control who buys from us and how they pay and if you’re offering a good service and they see value in it, you have more control than you think when it comes to setting collection terms.
If you can’t agree to an automatic withdrawal or credit card payment at the time of sale, some options include taking a void cheque for direct withdrawal or a credit card number if payment isn’t received by a certain date. Of course certain government agencies and large companies won’t bend to your rules, but it’s your choice at the end of the end of the day to work with them. Why bother chasing AR when you can avoid it in the first place?
Vice President, Business & Agriculture – ATB Financial
Though it may seem pretty basic, but there are two key things a small business can do to take control of their cash flow. Firstly, get a good understanding of how/when your business receives its income.
Secondly, try not to pay expenses/bills before you actually have the cash on hand to do so. Financial institutions can provide lines of credit to help manage this process…..but you need to have a good handle on your cash inflows and outflows beforehand….so you are not “managing” cash flow by accumulated debt.
Virtual CFO & Co-Founder, Summit CPA Group
Most small businesses manage cash flow by looking at one master bank account. With just one account, it can be hard to stow money away for taxes or for other projected expenses. It can also be hard to understand the health of your cash flow on a regular basis. What I’ve found to work well is to have three separate accounts, each with a different purpose.
1. Operating Cash Account
This is your primary checking account, and what you’re likely already using your existing bank account for, like everyday expenses, payroll, or incoming revenue.An easy rule of thumb is to keep two to four payrolls in this account.
2. Cash Reserve Account
This account is your emergency fund account. You know, if receivables aren’t being collected on time, or if you’d like to take advantage of a business opportunity (like a fantastic new hire), but you wish to use your own cash rather than going to a bank.
3. Tax Reserve Account
In this account, you stow away money for your state and federal taxes. Typically, you would transfer money into this account once a week. Many other companies do this quarterly, but we’ve found that it’s better to automate and adjust on a weekly basis.
I often ask people, ‘if you were buying a business and could only pick one financial statement to review (balance sheet, income statement or cash flow), which one would you choose?’ After some contemplating and debating, the cash flow statement usually wins. After all, it is made using the other two statements.
It’s always possible to have valuable assets and/or high profits but no cash available. Ignoring cash flow is a quick way to fail, if you don’t already start now by simply understanding and tracking this now!”
CPA, CMA | Part-time CFO
Cash flow suggestions
– consider requesting a cash deposit for service and specialty work. Once a product is built or service rendered your only recourse to payment is the receivable. A deposit mitigates credit risk.
– if selling in foreign markets consider foreign currency contracts to mitigate exchange risk.
– rather than placing inventory on consignment consider selling the inventory on an extended credit term ( ie due in 6 months vs 30 days)
Utilizing this strategy not only increased our control over our inventory but drove sales to our dealer base.
Dan Chow, CPA, CA
CFO at Entrust Disability Services
What works for me at no matter what point of the business I am is to set expectations and plan for your cash flow. If you don’t have expectations, then it’s difficult to know whether your cash flows are healthy or not. Once you know where your cash flows need to be some time in the future, then you have a better idea of what’s going to happen to your cash flows from now until then.
For example, let’s say your restaurant had positive cash flows in the months of January to April and suddenly it was negative in May. You do everything in your power to improve your cash flow, delaying payments to suppliers and minimizing capital expenditures and it was still negative. You look back and realized that you needed additional patio furniture for warmer weather and your restaurant had fewer customers due to playoffs happening in the city and everyone flocked to the bars.
Had you set your expectations back in January or February, you likely would have been more proactive in generating more sales from January to April to prepare for a slower May. You then wouldn’t be shocked when your cash flows entered the red territory, because you saw it coming. Hindsight is always 20/20 and sometimes you can’t know these things will happen, but having a forward-looking mindset and getting in the habit of setting expectations and planning for the future will eliminate a lot of unwanted surprises to your cash flows as you move forward with your business.
For many business owners, the difficult part is translating these expectations into numbers. I would advise starting off with a baseline set of cash flows that you think will happen into whatever future time period you’re planning for. If you’re starting from scratch, a baseline could be whatever your cash flow has been for the last few months. This is probably the easiest way since there’s not much to predict and you can draw from what’s already happened. Like any discipline, if you want to be good at it, you need to practice and endure trials and errors.
In my opinion, there’s no quick and dirty method to take control of your cash flow. It’s a culmination of knowing your business and your market and becoming familiar with the mathematics behind building cash flows so you can set expectations and plan for your cash flows with as much accuracy as possible. I’m not sure if that counts as a straightforward tactic, but it’s the first thing that comes to mind when I see this question.
Prepare (and Expect) to Pay Taxes
Many small businesses are surprised when it comes time to pay their taxes, whether it is GST, payroll remittance, or corporate taxes. These businesses work hard to earn every dollar, but not every dollar is theirs to keep or spend. Knowing their remittance deadlines and making tax instalments (pre-paying taxes) can help avoid future cash flow issues.
Businesses have the option to remit (or pay) their GST or payroll remittances on a monthly, quarterly, or sometimes annual basis. The same applies to corporate tax instalments. Canada Revenue Agency provides information to each small business, but sometimes this isn’t presented clearly enough to business owners. If you are ever uncertain of these deadlines, call CRA or ask an accountant who could help with this.
It is important for small businesses to make these payments on-time, not only to help manage daily cash flow, but also to avoid costly penalties from CRA. By paying these tax amounts as they are incurred, businesses avoid spending cash that appears to be available (even though it might be GST or payroll remittances that are owed to CRA). It also helps businesses avoid getting to the end of the year with no cash to pay their tax bills.
Since payments have pre-determined deadlines, they can be easily added to a calendar or reminder application. They can also be incorporated into forecasting/budgeting software (Dryrun) or an accounting system (Quickbooks, Xero). CRA also has a business reminder application that sends reminders to small business owners.
Adam Creagham, CPA, CMA
Recruiting Manager | Robert Half Finance & Accounting
Acknowledge – When invoicing your clients/customers make sure the terms of payment are agreed upon before the billing takes place. The last thing you want to be doing is worrying about tracking down outstanding debts 60, 90, 120 days after payment is due.
Designate – If you do need to track down outstanding payments, designate an individual who will be responsible for this. This is an invaluable skill-set that will pay off in the long-run as it will allow you to focus on your businesses core competencies.
Accessibility – Whether you’re using a platform like Dryrun or a simple shared spreadsheet in Excel, make sure the appropriate personnel within the business have access to your cash management outlook at a glance. When making important purchasing decisions, it’s convenient to know what and how much you can leverage instantly.
Motivation – Have a long-term cash flow goal for your company. How liquid do you want to be in 12 months? How much of your cash is tied up in investing activities vs financing activities? Will you be more liquid a year from now than you are right now? These questions will give you and your potential investor’s insight as to which direction your company is headed.
Max Palzewicz, CPA
Small businesses should look to accelerate their receivables and slow down their payables. Monthly recurring collections should be initiated via ACH transfer or Credit Card, if possible. Know your vendors’ payment terms and don’t pay any sooner than you have to!
Small businesses should also be able to assign dollar amounts not only to their Accounts Receivable, but also their Work in Process (WIP), and Sales Pipeline too.
Tony Colabella, CMC, CPHR
BUSINESS ADVISOR, CONSULTING SERVICES – MNP
Cash flow is everything, without cash or sufficient working capital, it makes it very difficult for a business to survive. Small business owners must keep a very watchful eye on their cash position, mindful of expenses and diligent in efforts to collect any receivables. Keeping up to date records is extremely important for small business owners, so that he/she has a current and clear picture of their cash position. Also, keep personal and business cash separate.
Founder & Owner – MMC Convert
It is said that Cash is King, managing the cash flow effectively is very essential. In the process of managing cash flow, Long Term thinking is very necessary.
Financial forecast will record the upcoming expenses so that they can predict the cash flow needed and can plan enough cash to plan expected expenses.
Finance purchase orders wherein you can purchase order on hand and financing company will pay the vendor. It will eliminate the problem of getting a large order but not being able to fulfil it because of cash to buy the material.
Expanding lines of credit can help in making payments for needed supplies and other business costs without putting down cash. This strategy can put more cash into business on regular basis.
Business might earn cash back on its line of credit. Small businesses should stay on top of their expenses, thus, one should not ignore the cost cutting opportunities because unmanaged outflow can be a silent business killer.
Underwriting Manager – ATB Financial
There are so many ways for small business to manage cash flow. Following are just a few examples;
1- Lease equipment instead of buying
2- Stay on top of your invoicing
3- Get a business line of credit before you need one
4- Speed up payments by offering deals
Take some time and look at all your expenses, large and small and map them out on a calendar for the year, so you can be ready for the predictable expenses.
There are many unpredictable expenses, but for those that happen every month/year – it’s nice to see them so you can plan. In addition it helps in tracking down those small monthly recurring expenses that you’re no longer using. We keep a shared google calendar so we can track all the software/services we sign up for as a team.
CFO at Celayix Inc.
Bill early and follow up with notices as the invoice becomes due. Daily reminders if the payment is late. Lots of software available to automate the process.
I would say that the tool I use is a proforma (Excel spreadsheet that I’ve created) to help me predict when I’m going to be in trouble with cash.
Establish clear deadline/objectives. Do you have an aspirational date for receiving input?
Given the current funding crisis in our sector, just having a cash flow at all, without having to consider collections agents, would set most businesses, especially in post-production, apart.
Its kind of why we have an Alberta Post Production Association now, to generate some awareness of the asset base in this province – and to try to advocate for keeping that as a provincial resource. When it would be really just so much easier and more profitable for most of us as artist/artisans to just go where the fish are.
William Dos Santos, CPA, CA
Manager – International Tax, MNP
Advise them to consider talking to an accountant
Now that you’ve honed in on the business strategies to keep the flow of cash coming, how could you forecast growth and outcomes in an easy, visual and collaborative way?
Learn more about Dryrun’s beautiful and powerful software, chat us up online or schedule a no-hassle Q&A and training session.