Canada: Cash Is King

Last Updated: May 22 2014
Article by Crowe Soberman LLP

This article was originally published in the inFocus Spring '14 Issue.

As an entrepreneur either just starting out with a business idea or growing an already established business, it is easy to get buried in the big idea and neglect the administration or business details. Here I highlight three big picture ideas that any entrepreneur should keep in mind.

Working capital:

Working capital in the business is likely to be made up of several components. Effective management of cash and near cash items requires that each component, including the systems surrounding it, be reviewed to ensure that it is used optimally.

For example:

  • What credit terms are offered to customers; are different payments terms offered to different groups of customers; are discounts provided for prompt payment; are invoices issued as soon as work is complete.
  • What is the process and policy for chasing overdue accounts; are credit limits reviewed periodically and adjusted as necessary.
  • Are inventory levels minimized, are order quantities optimized for different products.
  • Are corporate income tax instalments decreased where possible, based on expected earnings for the current year; does the company perform any work which is in nature research and development and may qualify for investment tax credits.
  • Consider leaving profits in the business to avoid borrowing, or pay bonuses and loan the net pay back to the company; consider financing specific assets, such as factoring receivables or using SR&ED credits as security.

Maintain a cash flow forecast:

Typically, insufficient time is spent on cash and cash flow forecasts while a business is getting off the ground. More often than not, the founder/entrepreneur takes more interest in creating and developing the idea.

Given the amount of cash required by many businesses to finance working capital, you should always monitor and manage cash closely. By identifying future financing needs early, management will be able to pro-actively seek additional funding or take corrective action before it is too late.

Maintaining a cash flow forecast allows you to predict when additional credit is required so you can avoid the need to raise finance at short notice. Delay generally leads to unfavourable terms and higher financing costs.

Control the company's growth and set the right goals:

The downfall of many an entrepreneurial business is to grow too fast and run out of cash, because the focus has been on maximizing sales.

Sales maximization can make sense, for example where a new product has to break into a market and gain credibility or market share. However, it is important to understand the effect on the business in terms of cash contribution and earnings. This exercise requires sufficient management information and ensuring related systems are able to generate reliable data.

If you have neither the time nor the inclination to deal with these issues yourself, then I advise you hire an expert. With the assistance of an accountant, you are free to continue working on aspects of your business you enjoy. Meanwhile, you can be satisfied knowing important financial details are being managed.

Alternatively, you should sit down with your Crowe Soberman advisor and review your cash flow practices to look for areas of improvement.

About the Author

Paul Rhodes is a partner in the Audit & Advisory Group. His professional experience includes construction, manufacturing, real estate and internal audit engagements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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