business cashflow

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Are you personally liable for your business debts?

When Bob’s Trucking Inc. started experiencing cash flow problems, Bob found his company was unable to pay all of its bills. He decided to use the money the company did have to pay for fuel and employees to continue operations because without fuel in the trucks or employees to drive the trucks, there was no business. At this point, he stopped paying the company’s GST and source deductions to CRA. He thought that if the trucking company ended up going bankrupt, the business debt to CRA would be taken care of through bankruptcy…WRONG!

Am I personally responsible for my business debts to Canada Revenue Agency?

When a business collects GST from customers or withholds source deductions from employees, it is acting as an agent on behalf of CRA. The company now has an obligation to remit these amounts collected to CRA. If Bob’s Trucking cannot meet this obligation in full, CRA will start arranging payment plans with the company. If this is still unsuccessful, CRA will pursue legal action against Bob’s Trucking Inc. to collect these amounts.

If CRA is still unsuccessful in collecting from the company, they can and they will go after the director of the company to try to collect these amounts. Here is where Bob’s personal bank accounts and assets are now at risk!

It is a slightly different story when Bob’s Trucking Inc. owes corporate income taxes to CRA. Since these amounts have not been collected by a third party on behalf of CRA, the company is not acting as an agent. The same collection process will be followed by CRA to try to collect these amounts from the company. But, if that is unsuccessful, Bob’s personal assets may or may not be at risk.

If Bob’s Trucking Inc. paid Bob dividends, then CRA can go after Bob personally for corporate income taxes owing up to the amount of the dividends he received. The logic behind this is if the company did not have sufficient money to meet its corporate tax obligations, how did it have sufficient money to pay dividends?

No business owner wants to find themselves getting behind with filing or payments with CRA.

When this does happen, most owners put their heads in the sand and try to avoid CRA’s phone calls and correspondence. This is a big mistake! CRA is willing to work with businesses to arrange payment plans to avoid pursuing legal action. But you MUST communicate with CRA.

This is one of the reasons it is important to have a professional accountant on your team. It is important to be proactive as a business owner so you do not find yourself in hot water with CRA. At Richardson Miller LLP, we have decades of experience working with business owners and corresponding with CRA.

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Get Paid Faster – Tips on Quick Accounts Receivable Collections

Getting paid should be easy.

Many entrepreneurs struggle with cash flow and wish they had more money in the bank. One of the most significant keys maintaining a healthy cash balance is collecting accounts receivable in a timely manner.

Here are some tips and tricks to ensure you’re collecting your accounts receivables as fast as possible.

Stay on top of your invoicing.

Picture the entrepreneur that is too busy doing the work to invoice his customer. Most people would agree that there is very little point to working in your business if you never receive any money. Hire staff/contractors to help you with this if you are too busy.

    • Invoice for work completed as soon as possible. If your customer typically takes 30 days to pay your invoice, the extra time that the paper sits on your desk equals added extra days before that money lands in your bank account.
    • After delivery of the invoice, consider following up with your customer to ensure that they have received your invoice as well as any other documents and information required for payment. This may include PO numbers, proof of delivery, etc. Missing information can add days/weeks or more to your collection time.
    • Consider automating your internal processes to save time in paper processing.
    • Ensure that your staff are aware that invoicing is a priority and that you have the manpower to get the task done on time.

Call and ask for the money.

Don’t be too busy to remember to call and collect from your customers. The money doesn’t land in your bank account any faster by sitting, hoping and waiting.

    • As time passes, consider simply picking up the phone and calling the customer. If your customer normally pays within 30 days and its day 35. Perhaps a gentle reminder is all that they need. Perhaps there are other circumstances.
    • It’s important that your customer be aware that they have bills to pay. Be the squeaky wheel. If they are in a tight cash flow position, when there is cash available for payments, you want your invoice to be on the top of the list.
    • Often calling and collecting money ends up on the bottom of the priority list for busy staff. Ensure that staff know that collection activities are a priority and consider hiring help as required.

Offer quick and easy payment options.

    • Do you accept electronic payments? E-transfers? Credit cards? While the merchant fees on credit card payments can cut into your profit, so can paying interest on your operating line of credit… or not being paid at all. There are many mobile debit and credit card processing options. If your customer is the general public, strongly consider some of these immediate payment alternatives.
    • Electronic and card payments can eliminate the old “the check is in the mail” excuse. Mailing payment can add an additional week to your collection time. Mention your electronic payment options so that your customer can also save money on postage

Offer discounts on quick payments or charge interest.

    • Does it make sense to offer your customers a few percent off of their bill if they pay immediately or within 15 days?
    • Alternatively, consider charging interest on late payments. Often people will delay paying you simply because there is no consequence to not paying you.

Evaluate your policies for granting credit.

    • Who are you offering goods and services to without knowing of their ability to pay?
    • Do your customers have to fill out a credit application?
    • Do you obtain their credit history?
    • Do you have internal controls that prevent sales staff to extend additional credit when previous invoices have not been paid?
    • Consider obtaining a retainer or deposit.

Know your legal rights.

    • If your customer is delaying payment, can you place a lien on a property? Make sure you are aware of your options and any applicable deadlines to register such liens.
    • What are your options with small claims court?
    • What are your rights to collect on invoices outstanding for over a year or two?
    • Develop a relationship with a good collection agent to assist with difficult cases.

Stay current on your record keeping.

You don’t know what you don’t know. Get meaningful financial reporting on a timely basis.

    • Current financial records will indicate exactly who still owes you money. Keep on top of bookkeeping and reconciling your bank account. Review your accounts receivable listing regularly.
    • Become immediately aware of any NSF payments by your customers.
    • If you take your box of records to a bookkeeper quarterly or annually, you may not realize that your customers invoice over 60 days old. Perhaps monthly bookkeeping options would be better for your operations.
    • Even with very simple operations with very few customers, it’s easy to forget that an invoice is outstanding.

Need assistance with bookkeeping or automating your invoicing processes? Send me an email angela@rmllp.ca.

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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.

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