Cash Flow Mistakes SMEs Should Avoid & 4 Easy Solutions

You need to buy supplies, pay staff, and make investments. But suddenly you don’t have enough cash on hand for these necessities. Cash flow sputters like this can significantly impact your business, so much so that you miss out on contracts, are late to deliver, drive away your best staff and struggle with other problems. For many small and medium sized enterprises (SMEs), most cash flow issues are the result of a handful of common mistakes that are easy to correct. Here are four things your SME should do to avoid common cash flow problems.

1. Conduct Regular Cash Flow Projections

If you know that a cash flow problem is coming, you can change your decisions to get your business on the right track. The key to seeing problems coming is to conduct cash flow projections. Many different accounting programs include options to project your cash flow. You can also project it yourself with basic expenses and accounts receivables information.

2. Finance Major Purchases

If you need to invest in new equipment, property, or other major purchases, don’t dry up your cash reserves to do it. You need the flexibility of having cash on hand. Look into financing options for all of your major investments. It may cost a bit more, but it also enables your business to be more financially flexible and take advantage of opportunities.

3. Regularly Check Your Profitability

If your business isn’t profitable, then you will inevitably struggle with cash flow. Even if you were very profitable the last time that you looked, it's important to review your finances regularly because things can quickly change. Check how profitable you are and look for ways to boost your profitability. You may need to charge more for certain services or products, focus more on selling what’s most profitable to you, or reduce your expenses. Regularly checking your profitability is a wise idea to streamline your business and prevent major problems before they pop up.

4. Keeping Good Invoicing Practices

When you get paid will dramatically affect your cash flow. In order to get paid as quickly as possible, you have to have strong invoicing practices. That means making payment terms clear to customers from the outset, sending out invoices as soon as you can, demanding payment in 30 days or less, following up on invoices that are late, and using strong collections tactics. If you work with fewer, larger clients and can afford to be selective, it is wise to take on only the clients who pay well. Also, you can consider offering stricter terms (such as higher late fees) for clients who routinely pay late.

What If You Are Still Having Cash Flow Problems?

Some businesses have to wait a long time for payment, manage large projects, and deal with other inherent problems that make managing cash flow more problematic. Factoring can help you manage your cash flow better so you can build a more robust business. You’ll get your money within 24 hours of issuing your invoice and be able to use it immediately. This can also benefit you by reducing the time and resources you spend on invoicing and collecting. Contact J D Factors for more information on how invoicing can help your SME regain control of your cash flow.

Invoicing Do’s and Don'ts - Advice from the Experts

You've done the work, now it's time to get paid! Are your invoices encouraging your clients to pay quickly and on time? Your invoice is part of your customer's experience with your business and doing it well will encourage them to pay you faster. 

It's important to be paid quickly – a good payment turnaround can benefit your business because strong cash flow lets you pay your bills, capitalize on opportunities, and remain stable. It all starts with invoicing. Here are our invoicing tips and guide on how to get paid quickly.

Include a Due Date

You shouldn’t think of your invoice due date as optional. Clients absolutely need a reminder of when the invoice is due whenever they look at it, or there’s no real motivation to go and pay it. You should also think carefully about the terms of your invoice. If your industry standard is 60 or even 90 days, you may want to buck the trend with something more reasonable, such as 30 or 15 days. These terms help you get paid faster and help you get on missing payments faster, too.

Also, keep your due dates consistent so your clients understand when they should pay.

Create a Self-Service Portal

Mailing or hand delivering invoices is outdated, and even emailing them creates the opportunity for them to get buried or land in someone's spam box. Try a self-service portal instead that offers payment methods to customers. Deliver the invoice through the portal, so that your customer is immediately able to pay the moment that they get the invoice.

Choose a portal with lots of payment options, or you will discourage your customers from using it.

Direct Your Invoice Properly

Sometimes your point of contact in the company is not the best person to send the invoice to. When you start working with a client, ask them who should receive the invoice. Often, you’ll have a dedicated contact in accounting who should get all of your invoices. This can save you time, as you won’t be relying on your contact to send your invoice to the right person. That extra step can actually add a lot of time if your contact is busy.

Offer Early Pay Discounts

If it is affordable for your business, offering a small discount for early payment can really help you get paid faster. Try offering a two percent discount for payment before the 15-day mark, or even earlier. Customers who want to take advantage of this discount will often pay the moment they get their invoice. That can save you a tremendous amount of time and work in collecting the invoice.

Don’t offer too much of a discount, or a discount for common pay terms like 30, 60, or 90 days. Those who pay exactly on-time should be motivated by late fees. Use a discount only to encourage the fastest turnaround possible, or you may simply be losing money without getting enough benefit.

Are you still struggling to get paid quickly, even when using these best practices? You can get paid even faster and have a healthier cash flow with invoice factoring! At J D Factors, we pay you as soon as you send your invoice, which can have huge benefits to your business. Reach out to learn more about factoring today.

How to Reduce the Risk of Your Accounts Receivable

There’s always some risk to your accounts receivable. You’ve performed the work and sent your invoice, but will they pay you? Not always.  

Depending on the size of your contracts and how often your clients fail to pay, your business could face some serious liabilities. Some businesses even declare bankruptcy after taking on a string of bad clients.

There are ways to reduce the risk of your accounts receivable. Business owners may turn to accounts receivable insurance or non-recourse factoring to find compensation for those clients who can’t pay. Which option is better for you?

Accounts Receivable Insurance

For a premium, accounts receivable insurance offers you protection from damages you incur from unpaid invoices. If you have to hire a collection service your insurance policy may cover the cost. Or, if you have to take out a loan in order to make up the gap for an unpaid invoice, your policy may cover the interest on the loan. This insurance is also useful if a disaster or technological failure has caused you to lose track of your account receivable records causing you to be unable to collect.

Just like other insurance policies, your accounts receivable insurance will have a policy limit. If you have large invoices you may need to pay high premiums in order to get them covered. Further, your premium rates will go up if you need to use the insurance. There’s also the chance that the insurance company will find a reason to deny your claim.

Non-Recourse Factoring

Non-recourse factoring, on the other hand offers more benefits and less risks. How does factoring work? You send your invoices to the factoring company and they send you the cash, minus their fee. At J D Factors we send you the cash owed you within 24 hours. With us, you have your money without worrying about hiring a collections company or taking out a loan to cover your losses.

You’re paid, but what about your clients? The factoring company collects from your clients directly. With non-recourse factoring, if your client never pays because of a credit issue such a bankruptcy, the factoring company takes the loss for you. That’s much more convenient and easier to plan around than trying to make an insurance claim only after your client has refused to pay.

For this reason, non-recourse factoring helps businesses keep a healthy cash flow and a more flexible business model that is able to invest or expand when needed.

Benefits to Insurance Brokers

If you’re an insurance broker, why would you mention non-recourse factoring to your clients? Not all of the contacts you have will end up choosing accounts receivable insurance. However, you can still make money on these contacts for whom accounts receivable insurance isn’t a good fit. Simply refer them to J D Factors for non-recourse factoring. We’ll give you a referral fee. Plus, if you can offer your clients the solutions their business needs, you’ll earn their trust, they’ll stay with you for all their insurance needs, and they’ll refer you to their peers. Talk about a win-win-win!

Contact J D Factors today to learn how to reduce the risk of your account receivables with non-recourse factoring for yourself or a client.

How Accountants Can Use Factoring to Simplify Tax Season for Clients

Many small and medium-sized enterprises (SMEs) are first drawn to an accountant's services when they realize they have made a mistake on their taxes or are facing an audit. As an accountant, you bear the duty of telling your client the bad news, that they are in tax arrears. It’s only natural to want to help them out of this unfortunate situation.

When you’re helping these clients fix mistakes in their own accounting process and find ways to pay their back taxes, factoring may be a great option to help achieve a positive cash flow and assist with tax arrears. Here’s how:

Pay the CRA with Money Owed

Factoring allows SMEs to immediately convert their accounts receivable into cash and allows them to get the money they are owed immediately after sending out an invoice. This predictable, positive cash flow can give your clients the ability to pay their owed taxes right away, preventing them from incurring more penalties from the CRA.

If your client has had difficulty putting aside and remitting HST in the past, J D Factors can help. We can only hand over the gross amount of your client’s invoices, retaining the HST. Thus, your client never has the HST on hand and does not need to pay to maintain a separate account for it. This saves your clients time, money and hassle.

Of course, if we hold back your client’s HST we will remit it to the government on whichever schedule they prefer, or are mandated to use, whether yearly or quarterly. This saves your client the time and hassle of making these remittances themselves. They won’t have to wait at the bank and won’t have to worry about forgetting to remit.

Payroll and payroll taxes like the Canada Pension Plan (CPP) and Employment Insurance (EI) are other major hurdles for many SMEs. Those who struggle to keep a positive cash flow and who can’t make payroll will fail to retain their top talent. They will also struggle to remit CPP and EI on time. In fact, these non-remittances carry the highest penalties.

Why Should You Recommend Factoring?

Your business clients look to you as a financial guide, and the more potential solutions you have in your pocket, the more value you can offer them. Factoring is one option that your clients may not have heard of, and that can benefit your most vulnerable clients, those in tax arrears.

Factoring offers a win-win, benefiting you as an accountant, too. You won’t have to deal with calls from the CRA if your client fails to remit their HST or payroll taxes because J D Factors will be submitting these funds on time for them.

J D Factors is also dedicated to working with companies that are unable to gain traditional financing from a bank. We can help your client’s business stabilize again. If they recover from their financial troubles, they’ll be around for many years as your loyal client.

Reach out to us today to learn more about J D Factors and how factoring can help your clients.

Track These Metrics to Monitor the Pulse of Your Business’ Cash Flow

Understanding your cash flow is essential to the health of your business. A strained cash flow will limit your potential, stopping you from taking advantage of new opportunities. In fact, a very limited cash flow could push your business into debt as you lose more in costs than you bring in. You need to be aware of your cash flow to make the best decisions for your business.

According to QuickBooks, the Small Business Administration found that a problem in financial structure is to blame for 28 percent of business bankruptcies. Unless you understand your cash flow, you could be next. Here are the key financial metrics you need to monitor to understand the state of your cash flow.

1. Accounts Payable

How much money needs to go out your door? This metrics includes all the bills you haven’t yet paid like payment for materials, supplies, contractors, and more. It’s a good idea to calculate the accounts payable that you owe now and estimate next month’s figure too. You should compare both to the next figure: accounts receivable. 

2. Accounts Receivable

How much money is owed to you? Your accounts receivable is the total of funds your clients should have paid you already. If your accounts payable is higher than your accounts receivable, you have a problem. If they are tight, you also have a problem. You need to be able to bring money in quickly to stay flexible and competitive. When comparing these figures, don’t forget to write off bad debt, or your accounts receivable will be inflated and misleading.

3. Time Worked for Small Businesses

The smaller your business the more relevant your time worked will be to your overall business cash flow. If you’ve worked significantly less, perhaps due to illness, you can forecast a reduction in accounts receivable. Cut back on accounts payable, or be in the red.

4. Free Cash Flow for Corporations

Larger, more complex businesses will benefit from looking at free cash flow over time worked. You’ll need to find your earnings before interest, tax rate, depreciation, amortization, and add them. Then subtract your capital expenditure, like mortgage payments and equipment costs, and subtract any change in net working capital. Free cash flow can help you ensure you’re not cutting into your business’ cash flow too much.

5. Cash Burn Rate for Start-ups

If you’re a funded start-up, it’s critical to monitor your cash burn rate and ensure you’re not limiting your cash flow by over-spending. You need to increase your accounts receivable before your “cash runway” ends.

The Solution: Accounts Receivable Financing

No matter your business size or type, if you have cash flow problems, you need to get the money owed to you in the door faster. Accounts receivable financing is a cost-effective way to do that. J D Factors will take care of your business invoicing for you. Send us an invoice and we will pay you for it within 24 hours, and then invoice your clients or customers on your behalf. With invoice factoring you’ll see a healthy cash flow is right around the corner.