How to Manage Cash Flow Problems

07 September 2016 by National Bank

Entrepreneurs must often manage cash flow problems, especially during the start-up phase or when major changes occur within the company. Here are ways to keep your head above water.

Go to the source

The first step consists of identifying the cause for the lack of funds. Is it an organization in good financial health merely going through a growth crisis? Or are we facing a (more serious) problem concerning the company’s earning power?

“Even businesses that are doing well need cash”, says Benoît Fontaine, CPA, CA, partner at Raymond Chabot Grant Thornton. “When a company has a history of earning power, it is usually easy enough to seek financing, be it for acquiring a new building or for additional equipment, for example.”

The funds can then come from shareholders’ equity (accumulated benefits or shareholders’ money, for example) or from long term financing, such as a commercial loan. If the needs are temporary, a credit margin will be enough to provide the necessary money to momentarily cover the lack of funds.

When earning power fails

When the company crosses a down cycle, Benoît Fontaine recommends first focusing on reducing spending rather than trying to increase revenue: “Increasing sales is a long process, which often requires other investments; namely in marketing. It is more efficient to study each expenditure item and cut out everything that we can do without”, thinks the turnaround and insolvency specialist.

Expenditure under the microscope

Here are a few avenues to consider for limiting spending:

    • Put research and development on hold;

    • Reduce operating fees;

    • Establish shared time measures, even lay off employees to limit labour costs;

    • Close a less profitable branch.

    Reduce stocks

    Surplus stock can also bring on liquidity problems. Benoît Fontaine recommends reducing all types of stock as much as possible, whether raw materials, finished products or merchandise.

    “In 2016, do we really need to have the equivalent of two months of raw material reserves?” says the Raymond Chabot Grant Thornton partner. What’s more, he proposes favouring on-demand production in order to avoid finished product accumulations that have not yet found a buyer.

    Rigorous invoicing

    If working to increase sales isn’t the ideal short term solution, it remains important that you at least receive payment for all delivered products or services. Accelerating cash inflows is indeed a way to avoid the bottom of the well. “One must demonstrate lots of rigor in billing and collecting”, says Benoît Fontaine, who believes that we must not hesitate to put pressure on bad payers.

    Many banks also offer small and medium-sized businesses the discounted purchase of their client accounts. The operation consists in transferring your debt to the bank, or to a factoring company, who then ensures recovery. Hence, businesses who use this service quickly obtains the sums due to him by his clients without having to wait the 30, 60 or 120 credit days provided to them.

    Dealing with vendor accounts

    The discount principle also applies to vendor accounts. The bank pays the vendors without delay in lieu of the company, who becomes a creditor to the bank. The advantage: a longer payment term which can go up to 180 days.

    For an even simpler approach, you can directly ask your suppliers for an extended payment delay – delays you will try to set after the expected large amount of funds flows in. So they’re unenthusiastic about it? Proposing to pay a small amount of interest might win them over...

    Benoît Fontaine also recommends prioritizing payments to your important suppliers.

    Selling assets

    The company that owns the building they do business from could sell the building to become a tenant, says the Raymond Chabot Grant Thornton partner. On a smaller scale, unused equipment and material can also be sold.

    In any case, business leaders have much to gain from openly discussing their cash flow woes with their accountant or bank, who will be able to offer them advice adapted to their business’ situation.

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