Business Survival: It Begins with Cash Flow Management

According to Industry Canada, as of December 2012, there were nearly 1.2 million small businesses in Canada (businesses with at least one employee on payroll). But many don’t make it—even though they were profitable at the time of closure. Tax and business services specialists can help these businesses survive.

The fact is that current survival rates for small and medium-sized businesses in Canada decline over time. Approximately 85% of businesses that enter the marketplace survive one full year, 70% for two years and only 50% survive for five years.

There is no disputing that starting a small business takes a lot of work. Having the right tools and technologies in place is also an essential element for success, and one that many entrepreneurs overlook.

As reported by FundThrough in their October 2016 article, “Five Tools for Small Business Success,” the needs of businesses in specific sectors will differ; however, some support systems are essential to any company. Mitch Solway, vice-president of marketing for FundThrough, lists his top five as:

1. Cloud accounting software
2. Alternative lenders
3. Hiring
4. Payroll
5. Bookkeeping

Many entrepreneurs try to do everything themselves. This often leads to exhausted individuals trying to make decisions for their company. They often do not have all of the information, or the correct information, to make the best decisions for the growth and success of the business. Particularly in the early days of a company, those decisions can often have long-lasting results, both positive and negative.

Outsourcing some areas of the business may seem costly and not necessary to the entrepreneur, but in the long run may actually help the success of the business.

So how to stop potential business failures when the company is still profitable? Start by taking a close look at “payment terms.” This is a measure of the number of days between the time a service is provided and the time payment is actually made. Here’s a typical cash flow cycle for a small business:

Cash in:

– Average is 45 – 60 days from customers

Cash out:

- Rent paid in advance
- Employees paid on a regular payroll cycle
- Vendors and suppliers, 15 – 30 days

Clearly in this example there is a timing gap between when money comes in and goes out, which may lead to the business eventually running out of cash. And that, in turn, may cause the business to fail even though it is profitable.

Having a professional bookkeeper work alongside the business owner to monitor and prepare cash flow reports can help to alleviate potential cash shortages.

A bookkeeper can also ensure that government obligations, such as income taxes and GST/HST instalments, are paid on time in order to avoid costly potential fines and penalties. Government fines and penalties are time-sensitive and need to be paid promptly to stop accruing interest on top of the actual penalties incurred. This additional unnecessary cash outflow can be detrimental to a small business.

Many of the cloud accounting services offer directories of accountants and bookkeepers who are experts at working with small business owners and who are certified on their software. Finding a great bookkeeper whom you trust as an advisor early on will pay off huge rewards as you grow.

Educational Opportunities: DFA-Bookkeeping Services Specialist™ and MFA-Business Services Specialist™.

Sources:

“Five Tools for Small Business Success” – Postmedia commercial content division, on behalf of FundThrough.
“Statistics on Small Business in Canada” – Startup Canada, Source: Industry Canada
“Why Do Businesses Fail?” – 2011 Professional Association of Small Business Accountants

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