IS YOUR BUSINESS STRUGGLING WITH CASH FLOW?
Big jacked up trucks, RV’s, boats and off-road vehicles have been roaming Alberta and a better part of Western Canada for years. However, all of a sudden I’ve noticed many of these toys are being parked in driveways or showing up on car lots at discount prices. People have been laid off, unemployment is on the rise, oil prices have dropped in excess of 60%, companies are divesting from Alberta (and Canada) and the Canadian dollar has seen as much as a 46% hit (Jan 20, 2016). The slow down is impacting all of us and cash flow is on the forefront of our minds.
- How much cash do we have?
- How long can we continue like this?
- Will we have the funds to make payroll?
- Can we postpone our debt payments?
When times are good, businesses and operational budgets expand, and staff appreciation is plentiful. But where is the budget for the “rainy day”?
Good financial planning is essential in bad times, but even more important in the good times. How do you we establish good fiscal prudence without limiting the current wants while considering the future needs? Well, it’s never too late to create a plan, consider some of the following when preparing your plan.
Developing a strategy
Plans of any nature should always have a high level strategy accompanied by a detailed short term model (or check list).
Consider preparing a high level cash flow model that covers the “medium to long term” or 18 to 24 months. This model should show the business unit(s) summarized to monthly or quarterly activity, and will highlight high level pitfalls and opportunities. Often times this cash flow will help you identify the need for financing, investor funding, restructuring and/or the ability stock up on inventory to make sales targets. Real detail is however lacking due to the focus on the long term business and economic cycles. Consider looking at this model as the strategic map of your business.
Creating a checklist
The second cash flow model to prepare, is a “short term” or 3 to 6 month model showing a detailed breakdown of expenses and revenues, preferably detailed by week or day. This model will help monitor the day to day cash activities that are not necessarily visible in a medium to long term cash flow. From month to month you may be breaking even, however during the week you may dip in excess of your line of credit as you pay your suppliers before getting the sales proceeds from a customer. No details should be omitted in this version as it is essentially there to serve as a check list ensuring activities are in place to make sure the larger model works out.
Consider updating the long term model on a monthly to quarterly basis, where as the short term model should be done weekly to monthly. Naturally if events occur that have a significant impact on either model they should be updated as soon as possible, or depending on how tight your cash situation has gotten you may need to update more often.
Maintain budgets & approvals processes
It goes without saying that the cash flow models and high level strategy are only as good as the budgets supporting it. Budgets along with internal controls should be implemented to ensure accountability is maintained and targets can be reached.
What if I need more cash?
Once you have a cash flow model in place and a need for cash is identified, consider these sources of funding:
- Receivables – Collection of receivables, go after the business that you’ve already done and get paid for it already!
- Payables – Payable term changes, talk with your vendors & suppliers about your situation and the plan you have in place. But be cautious not to over promise and to under deliver for obvious reasons.
- Inventory – Consider Inventory turnover, can we move product faster by discounting? Also, go wipe the dust off the old inventory and free up the cash sitting on the shelf hoping for a better day.
- Line of credit vs Term debt – Proper financing is key, ensure your long term assets or fixed assets are financed through “term loans” and not operating cash. The term loan should match the life of the asset financed and only shorter if possible. Your Line of Credit is intended for the day to day operational needs of the business.
- Leasing – Sale lease back of assets is a great way to free up capital. This generally comes at a higher interest cost than traditional financing and the items “leased back” will serve as their own collateral (which you already own).
- Fixed assets – Sale of redundant assets, sell unused or dated equipment from the shop floor or warehouse. Even if its penny’s on the dollar, this is potentially cash sitting idle.
- New financing – Consider approaching your bank if you haven’t already done so to obtain an extended line. A strong business model and cash flow plan go a long ways. Don’t wait until its too late! its much easier to obtain financing when times are good.
- Equity – Obtain equity financing through divesting your ownership share and/or restructure among shareholders. Financially able shareholders can consider injecting cash in return for a larger share of the company.
- Lay-off’s – As a last resort for any business, lay-off’s are an option, keep in mind the qualified and driven individuals are an expensive replacement down the road. Consider removing the dead weight and the unproductive individuals. Communication with your staff is crucial in building trust and maintaining productivity. Lay-off’s can come in the form of permanent and temporary (short term) actions.
These are just a few of the options available to most business owners, strategy and accountability are key throughout this entire process.
Are you in a place of fiscal prudence and have you positioned your
business strategically to weather the current and future storms?
If the answer is NO,
We can help in the planning process
Contact us at
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To develop business strategies for growth & sustainability,
Through leveraging resources and easing commitments.
Peter Teunissen, CPA (ca)
Founder & CEO
– Leverage Consulting Group –