Canadian Plastics

Don’t lose track of your company’s cash flow

Cash flow management is at the heart of every business, and that's doubly true in the rough and tumble world of manufacturing. The observation that cash is king in business is hardly new. Indeed, you ...

November 1, 2010   By Edm



Cash flow management is at the heart of every business, and that’s doubly true in the rough and tumble world of manufacturing. The observation that cash is king in business is hardly new. Indeed, you can Google “cash flow management” and within the roughly 367,000 results you’ll find lots of sound, practical advice on all your cash flow problems. None of that information will do your company much good, however, if you don’t understand how money flows in and out of your specific business in the first place.

There are many recipes out there for managing cash flow, but where too many entrepreneurs fail is in understanding how to adapt these strategies to fit their particular business.

As a first step, 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 the slow periods.

3. If you don’t understand points 1 and 2, get expert advice. Your business depends on it.

Simply put, positive cash flow means having more money coming into your business coffers than going 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. Entrepreneurs need to remember that the line between liquidity and bankruptcy can be razor-thin.

The importance of paying attention

There are practical ways to prepare for cyclical cash shortages. 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. Instead, approach them when your balance sheet looks strong.

It’s also important to monitor the key indicators in your business — your bank account balance, accounts receivable turnover, inventory turnover and sales growth. Paying close attention to these metrics on a daily basis will help predict whether your company will have a cash flow issue or not.

Another 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.

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

Edme Mtivier is the executive vice president, financing and consulting, at the Business Development Bank of Canada (BDC). BDC is a financial institution wholly owned by the Government of Canada that supports the development and growth of Canadian small-and medium-sized businesses through its financing, investment and consulting solutions. For more information, visit www.bdc.ca.


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