Cash flow management should be an integral part of your business’s risk assessment and action planning. If your business is facing liquidity issues, it should trigger an alarm so you can conduct a risk assessment and take the necessary steps to manage your cash flows. During the COVID period, almost all brick and mortar businesses have been suffering from liquidity and working capital issues. Businesses are falling down due to negative growth and a slowing economy. Many businesses are shifting from a non-digital business environment to the digital world. Those who better manage cash flows of their businesses are surviving this unprecedented time. Controlling the business cash flows will help you prepare for the long term.
The Government of Canada has launched many programs for small businesses that have provided financial assistance in the form of interest-free loans, subsidy programs, and other non-refundable financial assistance programs. There are certain ways through which small business owners can analyze their business’s spending patterns, reduce operational expenses to a bare minimum level, and improve the cash flows of their businesses.
1 Reduction in the Overall Business Costs
If you are a small business owner, reducing your business expenses was probably one of the first things you might have done it at the start of COVID. If the process of reviewing your business expenses is something that you cannot do on your own, you can approach a Chartered Accountant firm. They can review your business activities, identify weak areas of your business, and can also be your authorized representative with CRA at the time of tax filings.
2 Revisit your Variable Costs
When reducing the overall business cost, it is recommended that you reduce variable costs first, as it is a quicker way to immediately reduce your cash outflows. For example, you need to look for opportunities to reduce contract labor and re-distribute work to your permanent workforce so that your variable costs can be controlled.
3 Revisit Capital Investment Plans
When you face a liquidity crisis, you should assess which investments you should hold and which investments you should postpone until the COVID situation improves. You should consider the cash flow factor before making any decisions about your investment plans.
4 Focus on Inventory Management
You don’t need to block extra costs in holding high stock levels. If the prices of supplies go down, it is beneficial that you increase your stock level, provided your warehousing cost and liquidity situation may not deteriorate.
5 Offering Discounts to the Existing Customers
When everyone is in a dire financial situation, you need to rely on the existing customers by offering them discounts and other promotional offers instead of selling your product to new customers on credit. This will reduce the risk of having poor cash flows.
6 Cash Flow Projection
It is highly recommended to prepare a cash flow projection for the coming year. You can prepare a spreadsheet or use accounting software to plug in expected monthly cash inflows and outflows based on the historic data. You can use the projected cash flow statement, anticipate when your sales will probably have a downward slope, check your actual cash position regularly and compare the projections with actual data and take prompt actions if there is any divergence.
7 Speed Up Cash Inflows
Getting money into your business faster can save you costs on your line of credit. You need to send invoices faster, have customers pay electronically, and charge slow payers’ interest. At the same time, you can also ask your vendors to give you more credit period so that you can manage your cash flows.
8 Check on Your Business’s Profitability
Finally, you need to check the profitability of your business. You need to make sure that your business is earning a reasonable amount of profit. For a small business, you must keep a close eye on items that have low potential to generate high profits. You can take such items out and rely on products capable of generating high profits.
We know times are certainly tough for some, and even brutal for others right now. Managing your cash flow during these times is essential to keep your business moving forward. Hiring a Toronto Accountant to help might seem expensive, but I would encourage you to do so as contacting an Accountant can actually save you more money as they can assist in helping you create a cash management projection while assisting in where you can save more money, will offset the costs of an Accountant.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.