Cash Flow Management for Small Business

According to recent data, many Canadian businesses are facing considerable challenges with cash flow management. A recent survey shows that about 87% of Canadian SMBs are confident in their performance, but about two-thirds are struggling with cash flow. Unfortunately, for many, cash flow kills more businesses than the lack of profit.

This is why cash flow management for a small business is so incredibly important. When you manage your cash flow properly, you can avoid last-minute decisions, keep day-to-day operations stable, and reduce your reliance on emergency borrowing.

Luckily, in today’s blog, our team at Bizfund shares small business cash flow tips so that you have a better understanding of managing cash flow in Canada.

Understanding Cash Flow vs Profit

Although cash flow and profit are related, they are not interchangeable. Many businesses make the mistake of believing this is the case; that’s why it’s important to understand the differences.

The Difference Explained Simply

Let’s break it down in simple terms. Sometimes it helps to do this, especially if you’re developing a startup or your business is fairly new.

Your profit is your revenue minus your expenses. This will be an amount you record for a specific financial period, based on accounting rules. On the other hand, cash flow is the movement of actual money, or ‘cash’, into and out of your business bank account, based on when you receive payments and when you pay bills.

Having cash on hand is what pays your payroll, rent, taxes, and suppliers. So if money is coming in later than expected, you could be doing ‘well’ on paper but still face immediate pressure in your bank account.

Why Profitable Businesses Can Still Fail

We know you don’t want to hear it, and we don’t necessarily want to say it, but profitable businesses can still fail. A common example is with businesses that operate on Net 30-day and Net 60-day invoice terms.

With these businesses, they could pay their payroll and suppliers weekly or biweekly and only be paid in 30 to 60 days. If several of these invoices are outstanding at once, these businesses may not have enough money to cover their obligations. This means that even though they are earning revenue, they are still failing.

Cash Flow Forecasting Basics

One of the best ways to manage your business’s cash flow is to learn the basics of cash flow forecasting. You need to practice cash flow forecasting, as it helps you plan based on what is likely to happen in your bank account rather than relying solely on your income statement.

Basically, it’s what gives your business a practical view of upcoming inflows and outflows, so you can better prepare for gaps before they become urgent.

How To Create A Simple 13-Week Forecast

Creating a 13-week forecast is where you’re going to want to begin. After you prepare your first one, it will be simple to manage and maintain every quarter. To create this forecast, you need to use a spreadsheet with a program like Excel. You’ll have one column per week with rows for inflows and outflows.

Under your inflows, list expected customer payments by week based on your invoice due dates and realistic collection timelines (account for slow-paying clients). Then, under your outflows, you’ll include your business’s fixed expenses. These include insurance, payroll, rent, loan payments, and CRA remittances, such as HST/GST. However, under outflows, you’ll also want to include any variable costs, such as subcontractors or inventory.

Once you’ve created this 13-week forecast, you’ll have a weekly view, and you can see how things are expected to look for your business in terms of cash flow. For example, if you’ve put everything together properly and week 7 shows a shortfall, you have time to accelerate collection efforts and tighten spending. You’ll also have time for arranging short-term funding with a merchant cash advance, for example, before discovering the issue when payments fail.

It’s also important to remember that your 13-week forecast is not a set-it-and-forget-it spreadsheet. You need to update it weekly to keep it accurate and reflect real changes in expenses, sales, and payment timing.

Tools And Spreadsheets That Help

If you don’t want to create your own 13-week forecast, there are other tools and spreadsheets available that can help you monitor and manage cash flow. For example, many accounting platforms in Canada offer free templates, including Xero, QuickBooks, and Wave. These platforms support cash flow tracking and reporting for businesses. These can be incredibly powerful tools for your cash flow management toolkit.

However, if you feel like accounting platforms are a little too daunting for where your business is currently, you could stick to simple cash flow templates. Just remember to pick one you’ll actually use and maintain weekly.

Improving Cash Inflows

When we talk about improving cash inflows, we’re discussing how you can improve how quickly you collect money from customers.

However, the goal of improving cash inflows and cash flow management for a small business isn’t to pressure clients. The goal is to reduce delays caused by processes and unclear expectations.

So with this in mind, here’s a look at a few of the best ways to improve your business’s cash inflows:

1. Speed up your invoicing: To get paid faster, it’s best to send invoices immediately once you have approval for deliverables or after you deliver products. If you wait until the end of the week or month, it extends the time before a client even sees the invoice. So, if you invoice faster, you shorten the payment cycle and make cash flow more predictable.
2. Choose payment terms that work: It’s common for payment terms to be Net 30, but it’s not a hard rule. Many smaller businesses successfully use Net 15, due upon receipt, or staged terms depending on the service. Just make sure your business payment terms are clear in your contracts and on your invoices, with specific payment due dates.
3. Make deposits compulsory: We know this might not be something you want to do, but consider making deposits compulsory. They can reduce the risks you could face when funding a project with your own money. If you don’t want to do this, consider progress billing, where you align payments with the work you complete. This way, you won’t risk not receiving a lump sum at the end, protecting your cash flow.

Managing Cash Outflows

When it comes to cash flow management for a small business, you also need to learn how to manage your cash outflows. Many small businesses make the mistake of thinking that managing cash outflow means delaying everything, but that is the wrong move.

Instead, you’ll want to learn how to strategically make payments to keep your business stable while meeting your obligations.

1. Time your payments: Use supplier terms as intended to make strategic payments. This means you should avoid paying Net 30 invoices immediately. If you do this, you risk draining your money without any real benefit. If you pay closer to the due date, it can help you preserve cash for rent, payroll, and other expenses, especially when your customer payments are slow to come in.
2. Negotiate with suppliers: Not everyone has the gift of the gab, but you don’t need this to negotiate with suppliers with whom you have a strong relationship. When cash flow is tight, talk to them. Many suppliers are willing to offer Net 45 terms, predictable payment schedules, or invoice splits to avoid late payments. So, there’s a high chance they can accommodate you if you run into issues, as long as it doesn’t become a habit.
3. Separate your essential and discretionary spending: As a business, one of the best strategies for managing expenses is to separate your essentials from your non-essentials. Usually, for most businesses, essentials include rent, payroll, utilities, taxes, insurance, and necessary software. Anything else usually counts as non-essentials, and you can, at times, delay things like equipment upgrades.

Building a Cash Reserve

Strategy isn’t enough. You also need to build a cash reserve when considering cash flow management for a small business. A cash reserve is like a nest egg. It’s a buffer that protects you when unexpected expenses arise or payment delays occur.

If you don’t have a reserve, your business could rely solely on borrowing or personal funds to cover your normal costs. Since you want to avoid this, here’s a two-step process for how to build a cash reserve:

1. Know How Much Is Enough

Most businesses aim for two to three months of operating expenses as their cash reserve. However, the right number will depend on your business model. For example, if the business is seasonal, you might need a cash reserve that is significantly larger than that of a year-round business.

In addition, if you have large customers with longer payment terms, such as Net 60, you might need a larger reserve to reduce stress when other payments are late. So, have a look at your financials and business model, and estimate how much you need in a cash reserve. Once you know this, you can start saving towards it.

2. Learn Where To Keep Emergency Funds

Once you know how much you need for your cash reserve, you need to know where to keep it. Usually, your best bet is to keep reserve funds in a separate business savings account that you can easily access. You want to be easily accessible, since it’s not a long-term investment and will be used for operational stability.

So, keep this in mind when deciding where to store your funds. And you’re not going to keep it in your main account because you want to avoid it being seen as spending. You also need to remember that if you use any of your reserve to rebuild it, it should be planned as a part of your company’s future cash flow.

When Cash Flow Gets Tight

You need to recognize the warning signs that cash flow is getting tight and how to bridge gaps when they arise.

Warning Signs To Watch For

A few warning signs that your cash flow is becoming tight include when you:

• Need to delay supplier payments.
• Are worrying about making payroll.
• Are using personal funds to cover business expenses.
• Have a growing balance of accounts receivable
• Are consistently paying bills later than planned.
• Have found yourself checking your balance before routine purchases.

These are all warning signs you need to revisit your forecast and collection process.

Options For Bridging Gaps

It’s important to know your options for bridging gaps. Usually, when timing gaps are temporary, you can explore short-term financing to stabilize your operations while you collect receivables. Some of the best options for small businesses in Canada include:

• Invoice factoring.
• A business line of credit
• A merchant cash advance

Although the business financing tools above can be useful, they are best used as bridges, not long-term fixes, so be careful not to fall into that trap.

The Key Takeaways On Cash Flow Management for a Small Business

Cash flow management for a small business is incredibly important. If you don’t know how to manage your cash flow, the warning signs, and what to do when cash flow is tight, you’re on a sinking ship. The more you know about cash flow management, the better the chance of your business succeeding.

​We hope that the knowledge our team at Bizfund shared helps you make cash flow management a habit, and we’re here to help with financing if you ever need to bridge the gap. You can apply here for financial assistance or contact us here to learn more.