Business Consulting

Profit and Loss Statements Don’t Tell The Whole Story

Your profit and loss statement showing you positive numbers. Yet you are struggling to find the cash to pay your bills on time. Or perhaps your sales volume has increased but you have less cash than ever? Sound familiar? Cashflow (defined as the net amount of cash being transferred in and out of a business) can make or break a profitable business. Poor cash flow can cripple a businesses ability to increase sales volume or if prolonged, can result in bankruptcy.

How to Improve Cashflow

  1. Get Paid Faster. It doesn’t matter how high your revenues are if your customers don’t pay you. Check out the article for some tips on how to speed up the collection process.
  2. Structure loan repayment terms appropriately. Are you trying to aggressively pay off that equipment loan in only a year or two? Talk to your accountant and banker about appropriately structuring that debt over the useful life of the asset.
  3. Take advantage of free credit. Are you paying your bills as soon as they arrive in the mail? Try waiting until the date that the payment is due or negotiate longer payment terms.
  4. Monitor inventory. Keep inventory at a reasonable level for your business. Several months’ worth of product sitting in your warehouse isn’t going to help when your checks start bouncing.
  5. Monitor overhead costs. Every little bit helps. Take the time to carefully review your subscription costs, telephone bills, vendors. Are you paying for things that you no longer need? Are there opportunities to negotiate a better deal?

How NOT to improve Cashflow

  1. Postpone filing and paying your source deductions with Canada Revenue Agency. The penalties and interest are not deductible for tax purposes and can add up in a real hurry. Continual late payments can also get you flagged for a payroll audit.
  2. Postpone filing and paying your GST/HST. Similar to your payroll, Canada Revenue Agency gets pretty cranky when these payments are late. Not paying GST on time is a great way to get your bank accounts seized.

Cashflow Analysis

Have you ever analyzed your cash flow?

A full analysis can be an eye-opening experience to realize the health… or the limitations of your current business operations.

Can You Afford to Grow Your Business?
  • Does your business incur direct costs prior to receiving payment from customers?
  • When are you required to pay your vendors/employees?
  • Compare this timeline to when you typically receive payment from your customers. How long are you required to finance your sales?

This gap between paying for costs and receiving money from your customers is referred to as your working capital days. The greater your working capital days, the greater your requirement to finance when you increase your revenues.

Do you know how many working capital days you’re currently financing in a line of credit? How much financing is required to grow your sales volume by $100? A detailed professional analysis can provide insight.

Example:

Picture a trucking company in Alberta. The typical customer tends to pay within 65 days from the invoice date. The company must pay its employees at the end of the month. During busy times, management relies on subcontract drivers who also demand payment by month-end. The company must also pay for fuel, repairs and various other costs within a timely basis. On average, the company must pay its’ costs within 25 days.

Based on current operations, this company must finance the costs of their sales for a full 40 days before receiving payment. The company relies on lines of credit and reserve savings to finance these sales. When sales volume increases, a larger line of credit is required. Consider additional costs associated with grown (equipment, staffing, etc.) combined with a larger line of credit. At a certain sales level, if cash flow is not carefully monitored, the company may simply not be able to obtain enough financing to grow.

The Power of One

The power of one (as part of a professional cash flow analysis) can be a useful tool in truly realizing the impact of minor changes in your business operations.

What would your cash balance/income/value of the business be if you:

  • Collected your accounts receivables just one day sooner
  • Paid vendors just one day later
  • Increased your sales volume by 1%
  • Increased your prices by 1%
  • Decreased your cost of sales by 1%
  • Decreased the cost of your overhead by 1%

These tiny amounts can equate to significant differences in the health of an organization. Perhaps that line of credit could turn into a positive cash balance. Quite often, this illustration can aid in management decision making.

Sometimes that decision is: We can’t afford not to hire extra office staff to help us keep on top of invoicing and collections.

Call me to discuss how a professional cash flow analysis can benefit your company.

New Entrepreneur Check List:

  • Brilliant idea?  Check.
  • Endless passion?  Check.
  • Supernatural ambition?  Check.
  • Nerves of steel?  Check.
  • A clear vision of success?  Check.
  • An accountant?  …. WHAT? WHY? …I haven’t made any money yet.  Why do I need to worry about accounting?

That is a fantastic question.

You don’t know what you don’t know.  When you don’t know what you don’t know, it’s easy to overthink the unknown.

Does it make sense to incorporate?  How do I incorporate? Do I need to register for GST?  Payroll vs Dividends? What can I deduct? How do I track my information?  When do corporate taxes need to be filed? Paid? How much to save for tax and GST?  Who should own shares in the corporation?

At this point, new entrepreneurs will generally do one of the following:

  1. Spend countless hours online trying to find information.
    There are endless sources of information online. Is it true?  Is it understandable? Is it relevant? How much time was spent researching stuff that you really don’t care about?
  2. Procrastinate.
    It’s easy to become overwhelmed at the thought of all those questions and vow to deal with it soon… very soon… next month for sure. Ignoring Canada Revenue Agency and it’s various filing requirements rarely ends well.  Consequences can range from penalties and interest to CRA seizing your bank accounts. It’s difficult to run a business when CRA strips your bank account of every penny each time you make a deposit.
  3. Ask friends and relatives. I can’t tell you how many times I’ve heard my clients say, “But my neighbour said I could claim all of my personal grooming expense in my business because I have to look presentable and presentable”.Or “My brother in law says he claims______________ ***insert ridiculous personal expenses here***_______”   All is well and good until there is an audit. At this point, you’re dead in the water.

Bringing an accountant from day 1 can:

Save you time.

  • More time to focus on your business—and less time is taken away from your family and loved ones.

Save Money.

  • Procrastination can be extremely expensive in late penalties
  • Also, save by coming up with a tax plan custom to YOUR business and personal situation
  • Perhaps there are certain elections you’d qualify for… or grants

Gain knowledge.

  •  An accountant can offer a bird’s eye view on your business idea.  What haven’t you thought about? Insurance? Financing? Are you partnering up with someone without a unanimous shareholder agreement?  What sorts of things can you deduct as it pertains to YOUR industry?

Assist in creating a strategic plan.  

  • Should you incorporate?  If incorporation is a logical choice, when should you incorporate?  Perhaps you’d be better off operating as a proprietor for a year or two first.  What would be an appropriate corporate fiscal year end date? People assume that December 31 is the obvious choice for a fiscal year-end.  The reality is, you can choose any date for a year-end and a non-December year end allows for so much more flexibility in tax planning.
  • When are the various government filings due?  Avoid surprises and prepare in advance.
  • How are you going to maintain your records?  Can you manage the documents yourself?  What tools/software and applications are available?  Do you need to hire a bookkeeper? What documents should be kept and for how long?  What are your options for the organization?
  • How are you going to pay yourself?  How much do you need to set aside for tax?
  • How are you going to manage your cash flow?  An accountant can assist with some strategies to make sure there is money in the bank.

Gain Peace of Mind:  – carry on your first year KNOWING that you’ve got a plan of action.

If you have questions about getting started, comment below or contact us.