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How to balance what’s coming in and going out.

For any business owner, making a profit is important. But solid cash management is critical to ensuring the health and longevity of your company.

Cash flow planning involves three elements: the amount of cash coming in, the amount going out and the cash you have on hand. Even if you’re a profitable venture, if you have more cash going out than coming in, you may find yourself in a tough situation. Without cash on hand, you may not be able to meet your business obligations, you may not have the funds needed to make investments and you may need to pay more in interest to borrow money to stay afloat, among other challenges.

If your business has been struggling to keep things balanced, these 7 steps can help you master cash flow management:

  1. Understand your sales cycle: To know what funds will be coming through the door, you need to look at a few key factors. For example, is a large part of your business seasonal or something that generates revenue only during certain periods? Are you letting customers pay you in 60 or more days when your suppliers require payment within 30? Identifying your business cycle’s peaks and valleys can help you plan ahead by anticipating potential cash flow issues. Not sure where to start? Check out our Cash Flow Worksheet to analyze your current cash situation.
  2. Optimise your collection policy: Your credit-granting policies may be negatively impacting your cash flow. New customers who ask for credit should provide references, according to CanadaOne, to ensure they have a solid credit history and low risk level. To ensure payments are received on time, you’ll need an effective monitoring system that lets you track which payments are late. Clearly communicate your payment and collection policies with customers and send them regular invoices so they know what items are still outstanding. Small Business BC recommends assigning someone to track billing and adding a process to handle unpaid bills that are 30, 60, 90 or more days late — which may include additional stipulations or fees.
  3. Control your purchases and manage your assets: An effective inventory (and cash) management plan can help you analyze sales patterns, increase working capital and convert inventory into money, according to the Canada Business Network. Is your purchasing policy hindering your cash flow? Orders should be placed systematically, based on what’s selling. (Working with suppliers that offer next-day deliveries may help you maintain a manageable inventory.) Ask your suppliers to consider offering you trade credit so you don’t have to pay right when you place an order. Utilize any return policy suppliers offer to unload unused goods. If a supplier won’t meet the terms you need, consider switching to a new one. You may also want to consider carrying inventory on consignment to reduce costs and leasing, instead of buying assets that quickly become obsolete. If you need to generate cash, selling slow-moving inventory at a discount can help you generate funds and pay off any outstanding loans.
  4. Pace other payments: If you’re experiencing cash flow concerns and are paying employees on a weekly basis, switching to a biweekly or monthly payroll may help alleviate some pressure. Stretching your average payment cycle by just five extra days can also have a positive impact. It’s also important to stay on top of all Canada Revenue Agency (CRA) payroll-related regulations, according to The Globe and Mail, to avoid costly fines. For instance, if you pay remittances for Canada Pension Plan contributions, income tax or employment insurance late, CRA may charge a 10 per cent penalty — and a 20 per cent fee if you’re late twice.
  5. Use your bank: The lending institution you use should offer terms that benefit your operational structure and cash management needs. Ask potential banks how quickly your sales receipts will post to your account, as well as if you can make a deposit before midnight and receive same-day credit — and have access to a line of credit that will provide some security during negative cash flow periods.
  6. Plan for taxes: Ensure you’re maximizing all tax deductions and deferrals — and that you’re making all regulatory payments on time (these can potentially disrupt cash flow, if you haven’t anticipated them).
  7. Balance cash flow and profitability: A healthy business should be able to avoid cash shortages while working to increase revenue. If possible, pass increased costs from your suppliers to customers. You may also be able to avoid paying interest by using trade credit with your suppliers or credit cards that offer interest-free periods. Consider protective measures like instituting a minimum order policy and avoiding supplying customers who are seriously in arrears.
  8. Maintaining a steady cash flow requires planning, perseverance and careful monitoring, but it’s an absolutely crucial part of running a successful business.

    For more tips on how you can successfully manage your cash situation, check out the Canada Revenue Agency’s small business checklist.

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