Sidhu & Associates | Chartered Professional Accountant & Tax Advisor
Sidhu and Associates | Chartered Professional Accountant

Maintaining a Healthy Cash Flow for Your Business

Rick Sidhu CPA, CGA

Rick Sidhu, CPA, CGA is a professional accountant, tax practitioner and Principal at Sidhu & Associates (Chartered Professional Accountant) [email protected]

Making a business profitable is important for any business owner. But it’s equally important, though often under-valued, that your company has a healthy cash flow to ensure the financial well-being of your business.

Cash flow management involves three key elements: cash inflow, cash outflow, and the amount of cash on hand. If the cash outflow is more than cash inflow, your company will have trouble meeting its current financial obligations. As a result, your company may have to borrow money at higher interest rates to remain in operation.

There are ways to plan your cash flows, so you can avoid these kinds of issues. Here are some tips that can help you maintain a healthy and balanced cash flow:

1. Understand your sales and receivables cycle:

You should consider some questions. Is revenue generation slow during certain times of the year? Do you offer more lenient credit terms to your customers than what your suppliers offer you? Are there gaps between when your cash went out to suppliers and when it came back in from customers? Identifying the highs and lows of your business cycle can help you plan ahead and make you aware of potential cash flow issues.

2. Improve your credit policies:

Credit granting policies may be negatively impacting cash generation for your business. Lenient policies may result in significant cash shortage, or borrowing costs. New customers should be asked to provide references and a proper credit check should be done before granting credits. It is also important to track late and overdue payments using an effective monitoring system.

3. Communicate your collection policies to your customers:

One of the key reasons for collectability issues is that business owners often do not properly communicate their collection policies and terms to the customers. Clearly communicate your collection policies and send them regular invoices, so they know the outstanding amount. Explain the process of any additional interest charges or fees on late payments ahead of time.

4. Control your purchases:

An effective inventory management plan can help you increase working capital, avoid purchasing extra inventory, and convert your inventory to money. Sales patterns should be identified before placing orders so that purchasing is done based on inventory sales. Collaborating with suppliers who can provide fast deliveries can help you maintain a just-in-time inventory and avoid buying assets that quickly become obsolete.

5. Control the pace of other payments:

Delaying the payment of some liabilities may help you preserve the amount of cash on hand for a longer period of time. This could in turn help you avoid interest costs on a line of credit or other short-term loans. You may be able to consider switching your payroll cycle to monthly from weekly or bi-weekly. That being said, you should always pay your CRA tax obligations on time. Timely payments to CRA will help you avoid hefty interest and penalties. Money saved is money earned. It is important to consider how much you can save by paying off your tax liabilities by the due dates.

6. Take advantage of your bank’s services:

Your bank or credit union should be able to offer you terms that benefit your operational structure and cash management needs. You should consider having access to a line of credit to allow some security during periods of negative cash flow.

7. Plan for your tax payments in advance:

You should work with your accountant to plan ahead for tax saving opportunities. Ensure you are maximizing all tax deductions and deferrals. Tax planning can help save a substantial amount of cash outflow in taxes.

8. Balance your cash flow and profitability:

A healthy business should be able to avoid cash shortages while working to increase revenue. You may be able to avoid paying interest by using trade credits with your suppliers or credit cards that offer interest-free terms. You can adopt some protective measures, such as refusing service to customers who you know will not pay or are seriously in arrears.

Planning and monitoring cash flows is a critical part of running a successful business. Consult Sidhu & Associates to help you plan and maintain a steady cash flow.