My Company is Profitable… So WHY AM I BROKE???

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.