Business Advisor: August-September 2012

When times are tough, cash matters more than earnings. Learn how to keep your dough on hand.

When times are tough, cash matters more than earnings. Learn how to keep your dough on hand.

The current economic climate seems to be uncertain for business owners. The Canadian economy has been uncertain for more than a year now, due to the European and American debt crises continuing to have negative effects in Canada.

In a recent survey, Harris-Decima randomly sampled 1,000 Canadians via telephone. When asked about rising interest rates, 48 per cent of the respondents said a significant interest rate hike would pose a challenge to them in keeping up with mortgage or debt payments. Of that group, 29 per cent said they would have difficulty making payments if rates went up by two percentage points. It is not certain when interest rates will increase in the current economy, but it is certain that interest rates will eventually rise. This puts significant pressure on Canadian companies as consumers are losing confidence, negatively affecting consumer demand. Lower consumer demand could result in lower revenue and may tip many companies into a loss position.

Cash is the lifeblood of any business and matters more than earnings in a tough economy. Here are some important steps to take to maximize your cash flow.

Implement cash flow budgeting and management
When you first start a business, cash is usually very scarce and most people are forced to either live within their means or fail. Being in survival mode can be helpful if you maintain the same mentality as your business profits grow. Having this mentality also causes a lot of stress on business owners as they are constantly worrying about having enough cash to fund operations.

You need to know where you are financially and have a plan for covering your obligations. Your business will have fixed expenses that have to be covered every week and month, such as payroll, loans, rent and utilities. In addition, you likely have variable expenses that are tied to your sales activity. When your sales rise and fall, variable expenses do the same.

Create a monthly cash flow budget and monitor it weekly. If your sales are falling short of your predictions, cut back on your expenses.

Maintain controls over accounts receivable and promote quicker payment terms
Monitor aging accounts receivable and quickly address any problem accounts that are past due. Consider offering a discount to obtain a quick payment of the overdue amount. Understand your clients and the industries they operate in to gauge whether stricter credit terms should be implemented to counter the increased risk in certain industries.

Promote credit card payment or cash payment discount at the time the order is placed. If clients are always asking for terms, get their credit card number as security for payment.

Continue to slash costs where possible
Tough economic conditions with falling sales volumes require cost-cutting measures wherever possible. When sales volumes are expected to decline, costs need to be closely monitored. Reduce spending on items that can easily be cut without affecting the sales levels of the company. Make tough decisions about payroll costs and don’t look back.

Bargain for credit terms with suppliers
By evaluating your supplier base, you may decide to consolidate your suppliers and be in a position to purchase more from one or two suppliers. This will allow you to obtain more favourable credit terms for the increased volume you will be providing to the remaining suppliers. Furthermore, as many suppliers will be hungry for cash in tough economic conditions, you may be able to obtain early payment discounts. 

Track inventory and supplies
Consider carrying less inventory than normal during tough times. Customers may be willing to wait a bit longer for orders if your suppliers can provide you with inventory on a just-in-time system. Try to identify waste in supply purchases.

Get smarter on tax
Don’t make tax payments any earlier than you need to. Many businesses remit taxes monthly when they may qualify to be quarterly or even yearly instalment filers.

Have a back-up plan
Always include a cash reserve as part of your cash management plan. Plans can sometimes take a negative path, and if a strategy is not in place for such emergencies, the business will be put under significant stress. Consider keeping some low-interest-rate credit cards with zero balances. However, be sure to keep the balance zero in non-emergencies.

If you are concerned about the viability of your business, remember that without sufficient cash flow, even a needed financial restructuring cannot be implemented. Many businesses end up closing down or filing for bankruptcy as they did not have the cash flow resources to go through a restructuring process that takes time while the business continues to operate. 

David Filice is a senior vice-president and partner in the restructuring and insolvency practice of Fuller Landau LLP, Chartered Accountants and Business Advisors. Contact him by calling 416-645-6506 or e-mailing dfilice@fullerlandau.com