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 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
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
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 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
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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Over the past year, we have watched the Canadian dollar drop relative to its U.S. counterpoint impacting Canadian businesses. U.S. goods and services are now more expensive, U.S. sales make a premium and errors when recording foreign exchange transactions can cost you more money.
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