According to the Canada Business Network, businesses enter and exit the marketplace each year. For example, Statistics Canada’s Entrepreneurship Indicators Database showed that the “total number of SME births was 78,430, compared with 83,240 deaths, which resulted in a net decrease of 4,810 businesses.”
Mismanagement, a subpar location, poor timing, bad products or services, lack of experience or just plain old bad luck can all contribute to a business closing down, but perhaps the most common reason is insufficient capital as a result of negative cash flow. The Canada Business Network provides a number of survival tips, suggesting that owners of SMEs “understand your business finances, such as cash flow and handling credit” to remain afloat.
What is cash flow?
Cash flow refers to the movement of funds into your business (in the form of revenue, investment or other sources), and the movement of funds out of your business (in the form of payments, bills, salary and other expenses). Cash flow is the lifeblood of your business and is necessary in order to keep everything moving smoothly and working properly. Without cash flow your business will not be able to support itself.
Positive and negative cash flow
When you have more money going into your business than going out of your business you have positive cash flow, when the reverse is true (i.e. that you have more money going out than coming in) you have negative cash flow.
Know your flow
Cash flow seems like a simple concept, yet it is one of the most common factors behind failed businesses. Even the best product, location, knowledge base, and sales team can’t save your business if your negative cash flow leads to insufficient capital.
Cash flow is more complex than just money in minus money out. You need to have a grasp of exactly where that money is coming from, where it is being spent, and just as importantly when. Your company can have a net profit but a net negative cash flow for a given time period. For example, if you bought $100,000 of inventory, sold that inventory for $200,000 but have not yet received the payment you may have a $100,000 profit on paper, but a net negative cash flow of $100,000.
Even though your sales team may have done a tremendous job to sell $100,000 of inventory for $200,000 you might not be able buy more inventory for them to sell (or even pay them their salary) until you actually get paid!
Simple tips to help you get a handle on your cash flow
Getting to grips with your cash flow is vital to operating and growing your business. If you want to keep your business running smoothly and well poised for the future, follow these simple cash flow tips:
• Profits are not cash: You can’t pay suppliers or employees with profits, you need cold hard cash.
• Growth requires cash: Growing your business uses cash, which reduces your cash flow. If you want to grow you need to increase your cash flow.
• Don’t do it yourself: Making sense of your cash flow isn’t as simple as adding up cash in versus cash out. You need to ensure you know where and when that cash is going. Don’t be afraid to call in professional help.
• Working capital is key: Working capital is the cash you have available to bridge the gap between making a sale and actually getting paid. Depending on your business this gap can be days, weeks or months.
At J D Factors our team specializes in helping small to medium sized businesses meet their ever-increasing cash flow demands so they can run their businesses successfully. Factoring, the process of turning your accounts receivable into cash, gives your company immediate access to working capital for things such as payroll, marketing, paying vendors, and purchasing equipment and inventory, without incurring debt. Contact me today for more information.
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