As we start a busy summer in the sunny Okanagan, it can be a time to reflect on the successes and challenges experienced through the winter months as you grow your business. Depending on the type of business you have, there may have been more cash challenges than seen during the summer months. It is a good time to be pro-active and plan for the coming year ahead.
Although it is instinctive to think that having strong revenues and profit will result in cash in your bank account that is not always the case. Even if a business is making money, the cash may disappear through inventory, receivables, work-in-process, and purchase of equipment or payments on debt among others. While these items do not affect the income statement, they can put stress on the ability of the business to pay bills, increasing the importance of managing cash flow.
A cash flow projection can be a useful planning tool to help map out the months and year ahead. It can help to determine the amount and timing of future cash flows and aid in decision making to ensure adequate cash will be available at times when the inflow may not easily match the outflow of cash. It can be a challenge to find the time to sit down and work through the figures needed to create this tool but can pay off when there is cash put aside for those times when it is needed most. There is also a sense of control knowing what the expected cash balance will be eight months down the road when a larger another annual payment is due.
It is prudent to also look at other ways to improve cash flow. Although increasing sales and attracting new customers may be great for your business, it may not be the quick answer if short term cash inflow is your goal. It can increase costs to attract new customers or generate additional sales from current customers and it is important to realize that if the added sales are on credit, it may not convert to cash right away.
Collecting receivables and tightening credit requirements can also have an impact on cash flow. There are many strategies a business may want to consider including discounts on early payment of receivables or accepting credit cards in lieu of providing credit to customers.
Payment of taxes such as GST, PST and income taxes can sometimes come up quickly for a busy business. It can be helpful to put funds aside as income is earned to minimize the impact of these taxes to the cash flow of the business
Short-term cash flow problems can be alleviated through a loan or a revolving line of credit from a financial institution. It is important to plan the months ahead but this tool can be used as part of the planning process.
There is much to think about when it comes to running your business and cash flow is one area that can be a big concern. Some time taken to plan the year ahead may make your summer a more relaxing one where you can enjoy the beautiful place where we live.
We encourage you to meet with one of our knowledgeable accounting staff at White Kennedy if you require help with cash flow issues. With accounting offices in Penticton, West Kelowna and Osoyoos, we offer excellent business advice to help you prosper.
Submitted by Jodi Hansen, Senior Manager, White Kennedy LLP
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.