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Small Business Week Special: Cashflow Management

By Debbie Lawes |

Don't lose track of your company's cash

Cash-flow management is at the heart of every business, and that's doubly true in the rough and tumble world of retailing. Here, the line between liquidity and bankruptcy can be razor thin.

Just ask Alexandre Bastide, President of Underworld Skateboard. The young entrepreneur opened his first store in Montreal in 1995 when he was just 19, and since then has seen many of his competitors close shop. The reasons were all too common, Bastide says.

"No business plan, buying without a budget, buying too much inventory," says Bastide, whose company sells skateboards, accessories and apparel. "Heck, I wasn't much better prepared when I started. I relied on my instinct, not a budget, for my first few years. It worked, but I was fortunate."

Bastide has since opened a second store in Vancouver and is now evangelical about managing cash flow. He says he's had little choice at a time of demanding suppliers, extra-cautious bankers and intense competition from big-box stores.

One of his key strategies is to develop excellent relationships with suppliers-a prerequisite for negotiating better payment terms during cash-crunch periods.

The observation that cash is king in business is hardly new. That's supposed to be Business 101 stuff. Indeed, you can Google "cash flow management" and within the 367,000 results you will find lots of sound, practical advice on all your cash flow problems.

Then again, maybe not.

"All that information won't do your company much good if you don't understand how money flows in and out of your specific business," cautions Edmée Métivier, Executive Vice President, Financing and Consulting, at the Business Development Bank of Canada (BDC). "There are a lot of recipes out there for managing cash flow, but where too many entrepreneurs fail is in understanding how to adapt those recipes to fit their particular business."

As a first step, Métivier says companies need to understand and embrace three principles of cash flow:

  1. Understand how cash flows in and out of your company, and how that fluctuates throughout the year.
  2. Establish, and continuously update, a 12-month cash flow projection. Think of this forecast as an early warning system that will help you have enough cash on hand to ride out slow periods.
  3. If you don't understand 1 and 2, get expert advice. Your business depends on it.

Put simply, positive cash flow means having more money flowing into your business than flowing out. Business 101 stuff for sure, yet not having enough cash on hand to pay bills is still one of the most common reasons companies fail.

"There are some basics of business that you just can't miss, and unfortunately too many people do," says Peter Brown, National Leader, Private Company Services at Deloitte.

Brown stresses that no company is immune from the impact of a recession or a fluctuating Canadian dollar. But for most businesses, cash flow is generally predictable.

"It's important to monitor the key indicators in your business-things like your bank account balance, accounts receivable turnover, inventory turnover and sales growth," he says. "Paying close attention to these metrics on a daily basis will help predict whether your company will have a cash issue or not."

There are practical ways to prepare for cyclical cash shortages. Métivier says companies can, for example, offer customers discounts for paying invoices early. Taking out a line of credit or term loan is another option. But don't knock on your banker's door when your company is bleeding red ink, Métivier stresses. "Approach them when your balance sheet looks strong."

One common mistake companies make is using their working capital to pay for long-term investments, such as new equipment, facility expansions or moving into new markets. You're better off using debt to finance these projects, or refinancing fixed assets to free up capital, Métivier says.

Bastide financed his Vancouver expansion with a loan from BDC, a loan from his landlord and a personal line of credit. He also sought expert advice, something too many entrepreneurs are either too proud or too frugal to do.

"Entrepreneurs are very proud people, and many believe, particularly when they start up, that they can handle everything themselves," Métivier says. "Don't be afraid of a little humility-talk to an accountant or a consultant. Both you and your business will be stronger for it."

Tips for building your cash flow

  1. Develop a cash-flow planner and track cash throughout the month
  2. Closely monitor financial statements
  3. Build good relationships with customers and suppliers
  4. Collect payments faster and pursue late bills
  5. Focus on inventory management and product offerings
  6. Use debt, not working capital, to finance fixed assets
  7. Use a line of credit, or your own money, to increase your working capital
  8. Refinance your fixed assets
  9. Cut waste and streamline operations
  10. Get external advice

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